For many investors, Real Estate Investment Trusts are good for minimizing the ...

11 11월, 04:04blog.pennlive.com

The best use of REITS in your portfolio is as a potential antidote, which at times can provide welcomed diversification as protection against rough bond or stock markets.

 

 Wise Money: Investing advice from Tim Decker, president of ISI Financial Group

 

  Q: I always thought it would be a good idea to invest in real estate, but I understand that speculating in real estate can involve lots of risk. Are there ways to invest in real estate without taking on excessive risk? Do you think real estate can be a good investment?

 

 A: Yes I do, and yes, there is a way. It’s called a REIT – a real estate investment trust. The best use of real estate for most investors is in small doses to diversify a portfolio that is composed mainly of more typical investments, such as traditional stocks and bonds.

 

 Directly investing in real estate can be quite tricky. When buying, selling and managing it (as income-producing properties), you can easily get stung. This is why many investors turn to REITs – a special investment vehicle that can hold different types of real estate in which investors buy shares.

 

 REITs can fill a role in your portfolio as an alternative investment -- one whose value sometimes moves in different directions than stocks or bonds. So, REITs may help fortify portfolios against stock and bond market downturns at times (with some exceptions, including the 2008-09 financial melt-down) because real estate’s performance isn’t always correlated with other investments.

 

 Attempting to invest in real estate directly requires tens or hundreds of thousands of dollars in capital for one deal, and even more for commercial properties. REITs make real estate investing accessible to the average investor – but without some of the risks or many of the headaches that go along with investing in real estate on your own.

 

 But what if you own a type of REIT that takes a big hit when that sector of the real estate market tanks? How can investors help protect themselves? The same way you can with any investments -- by diversifying among numerous varieties of REITs. The best and simplest way to do this is to own passively managed, well-diversified REIT index funds. That way, for example, if residential properties dip and you own commercial properties that are doing better, this may help protect you.

 

 What’s more, with REIT index funds you tend to have very low expenses. In contrast, actively managed REIT funds are like any actively managed fund – you have to pay high salaries of managers and brokers who may not be delivering much. one of the keys to good investment returns is to only buy investments with low costs. REIT index funds fill this bill.

 

 To further diversify your portfolio, you might also want to consider similar funds that include foreign real estate although some foreign REITs may not have the same regulatory structure as U.S. REITs. And, as foreign investments, they are subject to currency risk, but this can provide valuable diversification and a hedge against declines in the US dollar. So, investing in a globally diversified REIT fund that includes some measure of foreign properties as well as domestic holdings, can be a prudent decision.

 

 Globally diversified REIT index funds can be a good way to access the benefits of real estate investing without taking out a second mortgage on your home to do it – and then risking the homestead because of the vagaries of this tricky market.

 

 The best use of REITS in your portfolio is as a potential antidote, which at times can provide welcomed diversification as protection against rough bond or stock markets. Your investment in REITs should be great enough to achieve this – but not so great that it introduces more risk than it minimizes. As always, be certain to take into consideration your own goals, existing holdings and potential tax consequences.

 

 Tim Decker is the president of ISI Financial Group (www.isifinancialgroup.com ), a wealth management firm in Lancaster, and a fee-only financial planner (he sells no products). His weekly call-in radio show, Financial Freedom, airs Saturdays at noon on WHP580 AM. Decker answers questions from readers in the Patriot-News the third Sunday of every month. Readers may submit questions at Tim-wisemoney@isifinancialgroup.com .