Author Topic: Is investing in individual REITs a good idea?  (Read 11030 times)

joer1212

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Is investing in individual REITs a good idea?
« on: May 27, 2012, 03:35:21 PM »
Should I invest in individual REITs?

I already maxed out my employee 401k and 457b. My money in these is invested in index funds consisting of 60% stocks and 40% bonds/fixed income.
I have a few thousand dollars left over at the end of every year.
Initially, I was considering putting half that money into a REIT index fund (Vanguard REIT Index Fund: VGSIX), and half into a commodities index fund (Rogers International Commodities Index: RJI).
However, I was looking at the history of both indexes, and I discovered that they are VERY volatile. I would hate to retire when I need to draw money from these investments in a year where they are down 40%!
So, instead, I thought of purchasing a couple of individual REIT companies that pay a high dividend. So, even if the stock price of these individual companies is very volatile, at least the high dividend will cushion the ride.
I just opened up a Roth IRA with Scottrade, and I plan on investing $2,500 a year in 2 REIT companies from the following list:

American Capital Agency Corp (AGNC); dividend yield 15.52%

Sabra Health Care (SBRA); dividend 9.90%

Annaly Capital Management (NYL); dividend 15.11%

Two Harbors (TWO) dividend 16.8%

What do you think of this? It seems too good to be true that these companies pay double digit dividends, and yet their stock price has appreciated over time, too. What's the catch? Am I missing any risks or pitfalls?

FYI: I am 42 years-old, and I will be retiring in the next 8-10 years. My tolerance for risk is low to moderate.
« Last Edit: May 27, 2012, 03:38:32 PM by joer1212 »

astadt

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Re: Is investing in individual REITs a good idea?
« Reply #1 on: May 28, 2012, 02:14:50 AM »
REIT 101:
REITs are companies that are legally obligated to pay out around 85-90% of their profits in the form of Dividends.

They thrive during times where Interest rates are low (Interest rates are extremely low now, thus free money abounds for these businesses).

The moment institutional investors smell rate increases they will most likely begin a pull out; depressing prices and increasing yields. The bubble will then re-inflate with the $$ from individual investors that chase yield. Once rates are raised the bubble will likely burst with prices plummeting and dividends being slashed.

Im long several REITs but wont be in 5 months. I will likely repurchase my positions after rates begin their climb.

Consider any investments into individual stocks a risky gamble. Only invest in money you can stand to lose. Good Luck!

Kriegsspiel

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Re: Is investing in individual REITs a good idea?
« Reply #2 on: May 28, 2012, 01:13:25 PM »
I've got some money in a few REITs, Senior Housing and Agree Realty.  I haven't held them long enough to see a dividend yet, but I'm pretty psyched for it.

joer1212

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Re: Is investing in individual REITs a good idea?
« Reply #3 on: May 28, 2012, 02:46:17 PM »
Good info, Astadt.
The problem is that these two Reits will be in a Roth IRA wrapper, and it will trigger taxes if I sell them when interest rates rise. I'll be kind of stuck.
Whatever investments I choose for the IRA will have to be for the long haul. I can't just cash out and run. 
From the looks of things, I will probably end up purchasing a few blue chip dividend-paying stocks from Warren Buffet's holdings. The interest rates won't knock my socks off, but at least I will carry a quality investment product that is fairly dependable over the long haul.
Normally, I would have just bought a few more corporate bonds (I already have 4 totaling 74k), but there are 2 problems with this:

1) I don't want to lock in a low interest rate now and be stuck later when the rates rise

2) I can't take advantage of DRIPs when purchasing individual issues.
 
I knew there had to be a catch with the double digit interest rates.
« Last Edit: May 28, 2012, 03:03:31 PM by joer1212 »

arebelspy

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Re: Is investing in individual REITs a good idea?
« Reply #4 on: May 28, 2012, 04:09:41 PM »
The problem is that these two Reits will be in a Roth IRA wrapper, and it will trigger taxes if I sell them when interest rates rise. I'll be kind of stuck.

I'm not sure you understand how a Roth works...
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joer1212

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Re: Is investing in individual REITs a good idea?
« Reply #5 on: May 28, 2012, 06:30:26 PM »
Can I completely sell my investments within the Roth? How does it work?
Maybe there is hope, after all, that I can purchase the Reits, and sell them at the first sign that interest rates may rise.

arebelspy

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Re: Is investing in individual REITs a good idea?
« Reply #6 on: May 28, 2012, 06:35:45 PM »
Can I completely sell my investments within the Roth? How does it work?
Maybe there is hope, after all, that I can purchase the Reits, and sell them at the first sign that interest rates may rise.

Yes, it all stays within the Roth, tax free, unless you withdraw it from the Roth somehow and hit penalties.

Trying to time the market like that sounds like a bad idea to me, but best of luck to you if you decide to try it.
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astadt

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Re: Is investing in individual REITs a good idea?
« Reply #7 on: May 29, 2012, 12:34:51 AM »
Can I completely sell my investments within the Roth? How does it work?
Maybe there is hope, after all, that I can purchase the Reits, and sell them at the first sign that interest rates may rise.

Yes, it all stays within the Roth, tax free, unless you withdraw it from the Roth somehow and hit penalties.

Trying to time the market like that sounds like a bad idea to me, but best of luck to you if you decide to try it.

Agreed,  again make sure you can completely loose the money and go...oh well.

Think of your Roth as a big tax break cover and anything under it is growing tax free, you can use the Rothed money on just about anything in there (yep, gold, homes, pesos) but you will get charged a penalty on any capital gains that are pulled out.

arebelspy

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Re: Is investing in individual REITs a good idea?
« Reply #8 on: May 29, 2012, 07:11:23 AM »
but you will get charged a penalty on any capital gains that are pulled out.

Well..maybe.  Depending on when and how you do it.
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tooqk4u22

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Re: Is investing in individual REITs a good idea?
« Reply #9 on: May 29, 2012, 02:15:52 PM »
What do you think of this? It seems too good to be true that these companies pay double digit dividends, and yet their stock price has appreciated over time, too. What's the catch? Am I missing any risks or pitfalls?

If it seems to good to be true then it probably is.....

The problem is that these two Reits will be in a Roth IRA wrapper, and it will trigger taxes if I sell them when interest rates rise. I'll be kind of stuck.

I'm not sure you understand how a Roth works...

Or for that matter investing in general....you can't pick an investment based solely on the yield. 

First off - three of the REITS are considered mortgage REITS and use leverage to loans - this sounds familiar to me...oh yeah it caused the recession.  These REITS are likely beat up because they are sitting on a pile of bad loans or potentially bad loans. Increasing interest rates will negatively affect these. 

The other one is a health care REIT specializing in skilled nursing facilities - these are highly regulated and without proper management can be tough, plus the current state of health care reform and declining medicare payments could hurt this. 

You have to do more research.....either way you are probably better off buying index funds. 


jpo

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Re: Is investing in individual REITs a good idea?
« Reply #10 on: May 30, 2012, 02:10:04 PM »
2) I can't take advantage of DRIPs when purchasing individual issues.
You can if you ditch Scottrade. I initially had my Roth with Scottrade and jumped ship for exactly this reason, they don't offer DRIPs within IRAs.

joer1212

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Re: Is investing in individual REITs a good idea?
« Reply #11 on: May 30, 2012, 03:32:24 PM »
Duly noted on Scottrade.
I was at one of their local branches yesterday, and it was a big letdown to find out they don't offer something as basic and fundamental as DRIPs, unless you purchase a mutual fund. It leads me to believe they're not a serious brokerage company.
If they want to see even a dime of my hard-earned money, they better be more on the ball and offer everything that's out there, because I have no time for children's games. I'm a serious guy who's investing real money here, not play money.
As far as investing in REITs, I am leaning back towards my original idea of putting half into VGSIX and half into a commodities index fund (I'm not sure which one yet, the Rogers index fund? The Goldman-Sachs? The Dow Jones?).
The problem is that these index funds are very volatile, and they don't offer even a minimal dividend payout to cushion the ride. Heck, even the S&P 500 gives a 2% dividend just to be in it, am I right?


grantmeaname

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Re: Is investing in individual REITs a good idea?
« Reply #12 on: May 31, 2012, 09:19:22 AM »
If you're using only a small amount of them in your overall portfolio in order to hedge your exposure to stocks, the day-to-day fluctuations shouldn't matter a ton for your net worth.