The investment vehicle, signed into tax law in 1960, gives mom-and-pop investors a way to take part in big real-estate holdings.
Sourced through Scoop.it from: www.thestreet.com
Investors typically put their money into Real Estate Investment Trusts (REITs) for the same reason they make direct investments in commercial real estate. The main reason is steady income generated from rental contracts, along with the long-term appreciation. In addition, people tend to invest in direct commercial real estate because it is mostly uncorrelated with the stock market. To some degree this holds true in REITs, although the stock performance of REITs moved in tandem with the broader market following the Great Recession.
One of the most notable differences between investing in direct commercial real estate and REITs is liquidity. The REIT investor has the ability to sell stock at any time if they are not satisfied with the investment; direct commercial real estate owners, however, need to hold onto the properties throughout the maturation process.
Here are a few other examples as to why people like to invest in REITs.
1. Diversification- REITs typically own interest stakes in multiple properties located in different locations. For example, a hotel REIT is suffering from flat rates in Manhattan, New York; they have the ability to offset that with soaring rates in Boston, MA. Additionally, if a property is vacant due to renovation or repositioning, the vacancy is moderate because the REIT owns multiple properties.
2. Large Asset Class: Commercial real estate is the largest asset class in the U.S. after stocks and bonds. Investments can be made in apartments, data centers, hotels, offices, warehouses, and more. We classify REITs in fifteen broad categories to fit everyone’s investment strategy.
3. Inflation Hedge- Lease contracts typically include provisions that adjust lease rates to the inflation indexes. When the economy is growing, inflation kicks in. Lease rates often move with inflation. This is especially true for REITs that have short duration leases, such as hotels, apartments, and self-storage. These types of assets have the ability to quickly catch up with the inflation adjustments.
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.