Author Topic: REITs  (Read 9283 times)

Insanity

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REITs
« on: June 12, 2013, 08:47:01 AM »
I started reading about them, and given the spouse's uncertainty with renting (and the lack of funds to do it with at this point anyway) --

Does anyone have a recommendation on a REIT?  Are they that much different?  I have done a little research within Fidelity (my brokerage house), but haven't come up with a clear understanding of the differences.

Thanks!

footenote

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Re: REITs
« Reply #1 on: June 12, 2013, 08:56:27 AM »
By "uncertainty with renting" do you mean being a landlord?

Owning a REIT is basically investing in real estate. Some REITs own mortgages. Others own (and some also manage) residential or commercial properties. Some REITs are restricted to qualified investors and have large minimum investments. Others work more like mutual funds. Some pay dividends.

It's good diversification in general, but investors seeking yields have piled into REITs recently. So many here argue (and I tend to agree) they may not be the smartest thing to buy right now. But that's market timing (bad!); if you are young-ish and view this as a long-term investment, it may not matter.

Insanity

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Re: REITs
« Reply #2 on: June 12, 2013, 09:01:17 AM »
By "uncertainty with renting" do you mean being a landlord?

Yep.  Guess that was a little confusing.   Darn teething kid and lack of sleep.

jfer_rose

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Re: REITs
« Reply #3 on: June 12, 2013, 09:07:57 AM »
I have a small percentage of my portfolio in REITs as part of a diversification strategy (disclaimer: I am not very experienced when it comes to asset allocation, just following what I've been reading about). Vanguard offers a REIT index funds and I have one of those.

Reido

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Re: REITs
« Reply #4 on: June 12, 2013, 09:27:42 AM »
REIT stands for real-estate investment trust.

Basically one of the unique things about REITs is that they pay no taxes as long as they pass on 95% of their income in the form of dividends to the share-holders. The dividends are FULLY TAXABLE and if you are in a high tax state or higher federal tax bracket, you will lose a good portion of the proceeds.

Many REITs own residential, industrial or commercial property.  The nice thing about these is that they tend to be larger corporations and better diversified than a single property.  There is also no management on your behalf to worry about.  It is debatable as to how much these resemble companies and how much they resemble real property.  There is usually some degree of leverage in these investments, as they typically have to borrow money to finance growth and acquisition of new properties.

One specific subset of REITs are mortgage REITs (mREITs) which basically buy mortgage backed securities but borrow money at the short term interest rate to do so.  Basically they borrow money at the current short term interest rates (think of how CD's are paying 0.5% right now) and buy mortgage backed securities which are yielding more.  These investments tend to be heavily leveraged and very interest rate sensitive.  As of today you could buy ANH which has a 10% dividend yield.  Still, this is risky because if short term rates go up, then their borrowing costs will go up but they'll still be caught holding the 30 year mortgages with a 3.5% yield.  I, personally, avoid mREITs like the plague - too risky for my taste (and ANH is down 17% over the last 12 months).

REITs are not necessarily publicly traded.  There are private REITs and some people have been asked to contribute to some of these investments.  I hear a lot of horror stories about this, so I'm pretty skeptical about these.

Basically, I like VNQ, which is the vanguard REIT index ETF.  This encompasses very large REITs.  Also, I like KBWY which is an index of smaller REITs.  These are good as inflation hedges, because as inflation picks up, rents will most likely rise and long term mortgages are usually at fixed rates.  Inflation also drives up property values, which helps REITs.  Therefore, I like to put 10-20% of my portfolio in these (preferrably some tax deferred IRA or 401K money).

Hope this helps.  Im an expert by no means...
« Last Edit: June 12, 2013, 11:20:51 AM by Reido »

sheepstache

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Re: REITs
« Reply #5 on: June 12, 2013, 09:28:12 AM »
I have read that buying REITs that invest in mortgages is not a  great idea right now for the same reason buying bonds is not a good idea.  When interest rates go up, mortgage rates go up and so there is less demand for fund shares until there is turnover.  On the other hand, there is also a risk when interest rates go down that people will refinance or pre-pay their mortgages which cuts into expected earnings.

You will also want to look at taxation.  I believe, but could be wrong, that all REITs are less tax-advantaged than stocks, so you want them in a retirement account when possible.

George_PA

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Re: REITs
« Reply #6 on: June 12, 2013, 08:14:56 PM »
One of the simplest ways to get start is to get a brokerage account and buys shares of "REM".  It is an ETF that is made up of about 10 different REITs;  Due to the worry on wallstreet that the central bank will be raising interest rates in sept, this fund (and most REITs) have gotten slammed lately with huge price losses.  Thus, now is a good time to pick up some shares because they are on sale.  Word on the street is that when the interest rates go up the yields generated by these REITs will rise as well; thus, this is a really good thing for someone wanting to retire early.

Reido

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Re: REITs
« Reply #7 on: June 13, 2013, 07:05:56 AM »
REM is a mortgage REIT index.  If rates go up it will crash over the next couple years, as their borrowing costs will rise and their fixed long-term mortgages fail to move.  Over the very long period (10+ years) these could do okay assuming mortgage interest rates rise as well.

Basically, if the fed stops buying mortgages, these will get slaughtered.  They fell in anticipation of the fed stopping the easing process...  If the fed does stop easing, the bottom will absolutely drop out.

rugorak

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Re: REITs
« Reply #8 on: June 13, 2013, 07:53:26 AM »
I look at it this way. Owning a REIT means I get to invest in real estate without having to be a landlord. Being a landlord (in my opinion) has more risk but has more opportunity for rewards as such. You have to deal with finding tenants, fixing things quickly, taxes, etc. with being a landlord. But if you find good tenants, keep the place in good condition so there are rarely emergency repairs, and just factor taxes into the mix you can make a really nice return. However with a REIT you can get the majority of the benefits without as much risk since you will never get a middle of the night call that the plumbing broke or what not. But you probably won't make as much.

For me (at least for now) a REIT is a better choice for me. I have no roots and may end up moving. I already am on call every few weeks for work. So I don't need another thing that can wake me up. But for others being a landlord makes more sense.

arebelspy

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Re: REITs
« Reply #9 on: June 13, 2013, 09:02:33 AM »
So I don't need another thing that can wake me up.

Now, now, let's educate rather than spread fear.  I have never been woken up by a tenant.

I'm not a fan of REITs.  If and when I exit real estate for a paper portfolio, I don't plan on holding REITs specifically, just total market indexes.  They correspond anyways, but don't have nearly the same upside.

Definitely educate yourself though, as George_PA gave a great example of someone a bit confused (and thanks to Reido for the clarification). The yield will go up as the price drops, sure, but that's not a good thing.  If a stock pays out $5 dividend on $100 value (5%) but the share price falls to $50, it is now paying a 10% yield.  It's still paying the same $5 though.  Mortgage REITs will get killed when interest rates rise. 

This is very, very different than equity REITs which focus on investing and holding physical property and collecting and distributing rents.

Please do your research, they're as different as stocks and bonds are, even though both are called "REITs" (actually probably more different).
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George_PA

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Re: REITs
« Reply #10 on: June 13, 2013, 06:53:01 PM »
Reido and arebelspy, you both make good points; Thus Insanity you should take their advice, don't listen to mine (so don't buy REM ok?)

However, here is an investing philosophical idea for both of you to think about just for fun.

Suppose you are investor who occasionally (not all the time but once and awhile) wants to make some money from your investments not just from the dividends but also from prices increases.  To increase your chances of this happening, in general, you will have to buy your investments at a lower price than what you selling them for, right?  That much is straightforward, I hope.

But now here is thing, think about when are investments at a lower price or close to its lowest price?  When do they generally costs the least amount of money.  The answer is of course when the investment is question has poor prospects or the general population has generally agreed there is something wrong with it.  For example, it has a big defective or is generally understand to have poor future prospects.  Thus, the public at large agrees that such an investment should decrease in price and thus costs less (its poor prospects are priced in). 

Thus, if you want to buy low and sell high, you have to buy them when their prospects are poor and sell them when their future looks the brightest.  Thus, in order to buy low you have to, in general, buy terds.  Take for example, the DOW in the last five years.  The Dow hit its low in 2008 or 2009 (my memory is not exact) and hit a level around 6500; what was happening when it was at this super cheap price?  Hmm well lets see, the economic system of the entire US looked liked it was on the verge of collaspsing and that were heading for a long deep depression right.  I think some major wallstreet banks collapsed; there was mass panic;  What about the present now?  The DOW is at 15000 because the US now looks like it has a brighter future than back in 2008, right? 

So if you review the logic, in order to buy investments are very cheap prices, you have to buy them when they look like a dirty terds.  Otherwise, if it is generally agreed upon that its prospects are bright, this is priced already in with a higher price. 

Lets look at your logic as to why REM is a bad investment; First of all everything you say makes perfect sense, REM is doomed to fail, interest rates are going to kill it; You suggest that REM should only be brought when its future prospects are more favorable; however, this means by definition you will be buying REM at a higher price than me; in fact, if you use your logic to buy all your investments, you will always be buying them at high prices on average; thus, your logic is good and probably better than mine, but you may not be a very good buy-low sell-high type of investor, thus please stick to dollar cost averaging for your personal stash; this is only a friendly suggestion;

Now its true that REM could tank even lower than it is now and it probably will, however I admit that it is almost impossible to find an exact bottom for a given investment, we can only take a reasonable decent shot at guessing that right now, it is at its worst future prospects; we may be wrong but at least we will still be getting it at a decent price even its in not the absolutely cheapest price ever.  Another caveat is that even if we buy REM cheap and it tanks another 10% we have to keep our cool and not sell in panic;  Thus, this type of investing is not for the faint at heart.

Also keep in mind I only do this thinking for indices or ETFs that represent a large number of different funds.  It does not work with individual stocks because if you buy an individual company when its prospects are bad, you risk losing all your money because it could go out of business.  However, what are the chances of every single fund in this ETF going out of business?  Or what are the chances of every company in the DOW going out of business together as a group.  Not very high, right? Thus this is why I only think this way for indices and ETFs that represent a large number of different funds.

Hope your enjoy this theoretical argument for entertainment purposes.
« Last Edit: June 13, 2013, 07:01:52 PM by George_PA »

rugorak

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Re: REITs
« Reply #11 on: June 14, 2013, 09:11:23 AM »
Now, now, let's educate rather than spread fear.  I have never been woken up by a tenant.

That was not my intention. That is why I had "I look at it this way", and "For me (at least for now)  ..." Just my thought process. I have only woke my landlord once (and it was at 7:30am because I thought he was going to work but it turned out he had a snow day). But I like to plan for the worst. Even with on call I rarely ever get woke up. And that has a far higher probability of happening. (Personal experience is about 120 times woke up on call compared to waking the landlord once in 8 years) The bigger issue for me right now is not staying put. I am not even thinking of buying property for myself right now because of that.

Personally I am looking at VNQ - https://personal.vanguard.com/us/funds/snapshot?FundId=0986&FundIntExt=INT for my REIT just to diversify my portfolio a little.

arebelspy

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Re: REITs
« Reply #12 on: June 14, 2013, 09:36:19 AM »
Now, now, let's educate rather than spread fear.  I have never been woken up by a tenant.

That was not my intention. That is why I had "I look at it this way", and "For me (at least for now)  ..." Just my thought process. I have only woke my landlord once (and it was at 7:30am because I thought he was going to work but it turned out he had a snow day). But I like to plan for the worst. Even with on call I rarely ever get woke up. And that has a far higher probability of happening. (Personal experience is about 120 times woke up on call compared to waking the landlord once in 8 years) The bigger issue for me right now is not staying put. I am not even thinking of buying property for myself right now because of that.

I appreciate you adding that context.  :D

I'm sure it wasn't your intent, but you see how easy it is to throw it out there for people "don't want to be woken up by tenants" when if you stop and reflect you see that after 8 years you've woken them once... not much of a risk of that happening for the landlord.  It will happen, it's just so rare that it shouldn't be a concern for not owning a rental.  If one is that scared of it, they can have a property manager and then never get woken instead of very, very rarely.

Changing topics, I'm curious: why do so many of you feel like you need to have real estate exposure (via REITs) in your portfolio?
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rugorak

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Re: REITs
« Reply #13 on: June 14, 2013, 09:51:48 AM »
Changing topics, I'm curious: why do so many of you feel like you need to have real estate exposure (via REITs) in your portfolio?
My point of view, explained far better than I ever could, that may or may not be right for everyone ;)

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

The section on "25% = Real Estate.  VGSLX"

Insanity

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Re: REITs
« Reply #14 on: June 14, 2013, 09:57:04 AM »

I appreciate you adding that context.  :D

I'm sure it wasn't your intent, but you see how easy it is to throw it out there for people "don't want to be woken up by tenants" when if you stop and reflect you see that after 8 years you've woken them once... not much of a risk of that happening for the landlord.  It will happen, it's just so rare that it shouldn't be a concern for not owning a rental.  If one is that scared of it, they can have a property manager and then never get woken instead of very, very rarely.

Changing topics, I'm curious: why do so many of you feel like you need to have real estate exposure (via REITs) in your portfolio?

I just was asking because it seems like it was a big topic here.  Seems like an alternative to actually being a landlord and used for diversification outside of your own property.  Granted, I have some debt I need to get rid of before I invest a lot, but I was thinking of putting some into it.

rugorak expressed the same context/concern my wife had when I wanted to rent our townhouse.   

arebelspy

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Re: REITs
« Reply #15 on: June 14, 2013, 10:00:07 AM »
Changing topics, I'm curious: why do so many of you feel like you need to have real estate exposure (via REITs) in your portfolio?
My point of view, explained far better than I ever could, that may or may not be right for everyone ;)

http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

The section on "25% = Real Estate.  VGSLX"

Jim is FI, and holds that AA.

If you are FI, that helps answer my question.

If you are not, my question remains, and even Jim doesn't recommend that AA for someone in the acquisition stage, but rather just the Total Stock Market Index, so if you believe in his theories, you wouldn't be holding REITs (again, unless you're already FIRE'd).

Why would you pick his FI portfolio over his acquisition one if you aren't FIRE'd?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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rugorak

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Re: REITs
« Reply #16 on: June 14, 2013, 12:17:44 PM »
No I am not FI yet. And I was not going to get anywhere near his percentages. I am today and planning to stay stock heavy.

When I look at things today stocks have been on a tear. They may continue to go up, but may go down, or even hold steady. Bonds are crap right now. Interest rates are just too low. The REIT I am looking at (but have not yet bought) VNQ has decent dividends which is something I take into consideration. I basically looked at it as a way to add a little diversification and still get fair growth and dividends.

But now after reading the comments since my original post I am questioning whether I should or not. I was going to put in a buy purchase today. I guess I am having trouble seeing the big reason not to add a little bit of an index REIT such as VNQ to my portfolio when I am somewhere in between starting out and being FI.


arebelspy

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Re: REITs
« Reply #17 on: June 14, 2013, 12:34:28 PM »
Sounds like first you need to determine your goals, and then determine the best way to achieve them given your personal preferences and risk profile.

Otherwise you're just randomly buying what sounds good at the moment.  And while it's better to do that with index funds than individual stocks, it's still better to have a specific plan.  With that goes a reason and purpose for each of your investments.
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Reido

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Re: REITs
« Reply #18 on: June 18, 2013, 10:10:21 AM »
@ arebelspy

I appreciate your input.  There is one little-known fact amongst most investors - REITs have outperformed stocks over very extended periods of time.  It is also arguable that they outperform in periods of high inflation due to their ownership of hard assets...  This assertion may or may not be true...  But this is why I've chosen to add some to my overall portfolio allocation.

It is important to note that the tax implications of REITs may deter someone in higher tax brackets from buying them in any accounts which is not tax-deferred.

 

http://www.reit.com/DataAndResearch/IndexData/FNUS-Historical-Data/Annual-Index-Data.aspx

http://www.cohenandsteers.com/assets/content/resources/insight/PER003_RA_REITs_022713.pdf

arebelspy

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Re: REITs
« Reply #19 on: June 18, 2013, 10:27:52 AM »
There is one little-known fact amongst most investors - REITs have outperformed stocks over very extended periods of time.  It is also arguable that they outperform in periods of high inflation due to their ownership of hard assets...

Why are you not 100% REITs then?  (Or at least the majority, say, 80% REITs, 20% other equities, for diversification.)

But this is why I've chosen to add some to my overall portfolio allocation.

Ah, but how much did you decide is appropriate?  And how did you arrive at that number?

Just some questions for you to think about...
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Reido

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Re: REITs
« Reply #20 on: June 18, 2013, 06:38:51 PM »
Great questions...  Right now my allocation is minimal.  That's basically due to the tax treatment of REITs.  At my marginal tax rate, it makes little sense to chase the extra 1% return with taxable account money.  Since the dividends are fully taxable and account for 50% of the historic return of REITs, there's no actual after tax advantage for me unless these are tax sheltered.

Keep in mind that extra return always comes at a price.  In this regard, REITs have wider swings and are more volatile (they have a wider annual standard deviation of return).  It can be interpreted as "they're riskier" but that's why they're more lucrative over long periods of time.

Theoretically, one should define their risk tolerance and subsequently develop a portfolio that maximizes their return within that risk profile (the concept of maximizing sharpe ratio).  Of course, this process has pitfalls since most people reassess their risk tolerance at very inopportune times (like the bottom of the 2009 market).

wakkowarner

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Re: REITs
« Reply #21 on: September 03, 2013, 11:10:53 AM »
Just read this article: http://www.investinganswers.com/investment-ideas/mutual-funds-etfs/lazy-mans-retirement-portfolio-3605

Thought I'd come to MMM and read up on what people were saying about REITs.  The article claims, and just the discussion about asset allocation, has got me thinking.  Anyone know of any "calculators" or something similar that would automatically calculate your rate of return had you invested X dollars on Y date?  I know that past performance is no guarantee of future yada yada yada, but I'd like to double check the articles claims that the asset location they specified beat out the S&P 500 by the amount stated.  Right now I don't have any REITs, but have most in S&P 500 index, some in Russel 2000 index, some in bond indexes, and a few individual stocks. 

BC_Goldman

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Re: REITs
« Reply #22 on: September 03, 2013, 11:34:46 AM »
I bought $3k worth of VGSIX back in 2007 (slightly over 106 shares). Unfortunately, there was a major slump and my market value is currently $3020. On the bright side, dividend reinvestment has me now owning 140 shares. Bought when shares were $28.26 and they are currently $21.45.

2007 was also the year we started getting into real estate and that turned out pretty poorly too. I think real estate is a great investment tool, I just got in both methods at pretty much the worst possible time.

Dr. A

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Re: REITs
« Reply #23 on: September 03, 2013, 11:47:12 AM »
I came across this "backtesting calculator" on Bogleheads this weekend:
http://www.bogleheads.org/forum/viewtopic.php?t=2520

Haven't had a chance to play around with it. Primarily it's for testing asset allocation strategies over time, but if you look at the data tabs you can find total return each year for a bunch of Vanguard funds including VGSIX going back to 1972.

Mega

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Re: REITs
« Reply #24 on: September 03, 2013, 07:29:25 PM »
I was interested in REITs to encourage my wife to invest. I think one of the REITs MMM mentioned in his blog has a dividend of around 7%, which would demonstrate to my wife that stock ownership generates real Money.

She still has money in a CD... Because it is safe.