Is A Real Estate Investment Trust The Best Investment For You?
Smart investors know that pennies make dollars. If you’re eager to save, putting away money regularly—even if it’s just a little bit—can eventually add up to big bucks. But what if you think that the smart move is to be in real estate? Maybe you want to be the next Donald Trump or Barbara Corcoran, or maybe you just live in an area of the country, like California, where it looks like home prices are rising again. But maybe you’re not ready to buy a house, or you can’t afford to. Can you follow your instincts if you have just a little to invest?
A REIT Allows Investment Without Homeownership
The answer is yes, because you can invest in real estate stocks. One of the most popular methods is to buy what’s called a a Real Estate Investment Trust (REIT). Basically, what a REIT does is buy a portfolio of real estate, using money raised from many small investors like yourself. REITs are classified by what they buy, so there are hotel REITs that own bunches of hotels, office REITs that own bunches of apartments, etc.One REIT that you might have heard of (and I’m not endorsing any particular stock here) is Avalon Bay, one of the largest apartment REITs in the country, with over 50,000 apartments. (Californians might know the Avalon Del Rey or the Avalon Irvine; New Yorkers might know the Avalon Fort Greene or the Avalon Chrystie Place.) Another that’s been in the news is Hersha, which is a hotel REIT that has gone up 86% this year, according to Peter Slatin of Forbes.
REITs Are Volatile, With Great Potential Reward
One thing to note about REITs in general is that they pay out most of the money that they make in dividends. (They get special tax treatment if they pay out 90%). That means in good times, you can get a nice per-share payout. If you reinvest the dividends you get, your money will grow even faster. In bad times, though, since the REIT can’t hoard its money, there’s a danger of bankruptcy. Another warning: In general, REITs can be somewhat volatile stocks, with their prices going up and down more than, say, a food stock like Coca-Cola. Also, like stocks of utilities, REITs are considered to be sensitive to rising interest rates. (Why? Because both kinds of companies borrow to make their purchases—REITs borrow to buy their buildings just like electric companies borrow to build power plants. When interest rates go up, it’s more expensive to borrow money, and those stocks usually suffer).
So if you think interest rates are going to zoom in the near future, I wouldn’t buy a REIT. And if you’re only buying one stock, I wouldn’t go for a REIT, in case the price goes on a rollercoaster ride. If you’re buying a few long-term stocks, though, a REIT can be a nice way to put a little real estate in your portfolio without trying to raise the down payment on a house.