Real Estate Investing
Now a Safer, More Conservative Proposition
By Kara Stefan
 Investing
in real estate today isn’t anything like it was 15 years
ago--when the market collapsed due to questionable limited
partnerships and the old “swampland in Florida”
pitch. From the ashes of that debacle rose a smarter, lucrative,
and less risky investment, called the Real Estate Investment
Trust (REIT).
A REIT is to private developments and limited partnerships
what a mutual fund is to stocks. Instead of plunking all of
your money into one make-or-break real estate deal, your contribution
is spread out among several real estate investments, allowing
for diversification. It also allows the smaller investor to
participate in large-scale commercial projects.
Not only that, but REITs are professionally managed like mutual
funds. And because of the high-flying deals of the 1980s and
early 90s, the IRS now strictly regulates REITs.
REIT Structure
Andrew Davis, president of Davis Selected Advisers, L.P. and
manager of the Davis Real Estate Fund, believes the best way
to describe REITs is that essentially you become a landlord.
“A REIT is a low-risk, highly regulated, excruciatingly
monitored investment which, in turn, provides a predictable
earning stream,” Davis explains.
A REIT is organized as a corporation or business trust and
must be managed by a board of directors or trustees--providing
the assurance that several people are overseeing the way your
investment is being managed. REITs must also have a minimum
of 100 shareholders, so you know you’re not in this boat
alone.
And finally, the lucrative part of this investment, REITs
are required to pay out at least 95% of their taxable income
in dividends--which generally translates to a 5-14% yield
per investor.
Performance & Risk
Although mainstream media often overlooks REITs, their returns
of late haven’t been too shabby. One REIT benchmark,
the Dow Jones Equity REIT Index, has returned 18.5% year-to-date--not
bad compared to the 10.5% returned by the S&P 500 and
a 20.8% drop in the NASDAQ.
Another appealing characteristic of REITs is that they’re
considered comparatively low risk investments. In fact, many
offer higher yields and lower risk than bonds.
A common measure of risk or volatility is called a beta.
For example, if a stock has an extreme reaction to market
movement, it has a higher beta. The more speculative a stock
or portfolio, the higher its beta. REITs have a beta of .40,
compared to 1.00 for your basic stock in the S&P 500.
At .40, REITs do not experience wild fluctuations and can
appreciate in value during periods of both inflation and economic
strength. This is because the underlying property values,
occupancy levels, and rental rates may rise no matter what
is happening in the rest of the investment market.
The Future Looks Good
Many experts believe REITs are still trading below their potential,
forecasting returns 15%-20% higher than their current levels.
In fact, now is a great time to jump on board because during
the past two years they’ve been overlooked in favor of
go-go tech stocks.
Tom Peck, vice president of investor relations at Duke Weeks
Realty Corp., one of the five largest REITs in the U.S., says
that operationally, REITs are very strong and continue to
grow earnings. Unfortunately they haven’t performed as
well recently subject to money flows--that is, flowing out
of REITs and into technology stocks.
“REITs have a very strong negative correlation with
tech stocks,” observes Peck. “As investors started
chasing the exciting returns of the tech sector two years
ago, we noticed money going out.” However, as the technology
market began to slide last spring, investors wised up and
rediscovered REITs.
Simple Investment
“Real estate corporations are not that hard to figure
out in terms of their complexity,” says Peck, suggesting
that they’re ideal for the novice investor because it’s
easy to see where revenues come from--leasing. Plus, there
are only about 300 REITs in the U.S. today, so the selection
is not quite as mind-boggling as the 11,000 mutual funds currently
available.
Another nice feature is that getting started at investing
can be very easy and cheap. At Duke
Weeks, all you have to do is log on to their Web site,
read about their dividend reinvestment program (DRIP), and
enroll online with an investment as low as $25 a month--which
you may arrange to be deducted automatically from your bank
account. You don’t need a broker to invest in a REIT.
There is, however, another alternative--you can buy REIT shares
through a real estate-specific mutual fund. For more information,
the best place to start is the National
Association of Real Estate Investment Trusts (NAREIT).
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