When your portfolio is loaded with stocks and not much else, many experts will tell you that real estate is one of the best ways to diversify. With the housing sector currently in slump in most places, this could be a good time to bottom fishing some undervalued properties.
But for those that do not wish to buy physical real estate, the use of Real Estate Investment Trusts is still a valid diversification strategy especially for investors who have a long term view.
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What Is a REIT?
A REIT trust company that accumulates a pool of money, through an initial public offering (IPO), which is then used to buy, develop, manage and sell assets in real estate. The IPO is identical to any other security offering with many of the same rules regarding prospectuses, reporting requirements and regulations; however, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing and selling of property and distributes it directly to the REIT holder on a regular basis. (For further explanation, read our article: What Are REITs?)
One of the most important advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders.
|Company||1 Year %Return|
|iShares Cohen & Steers Realty Majors ETF (NYSE:ICF)||+25.43%|
|Vanguard REIT Index ETF (NYSE:VNQ)||+24.03%|
|DJ Wilshire REIT ETF (NYSE:RWR)||+23.78%|
|Wilshire US REIT ETF Inc. (NYSE:WREI)||+19.23%|
Investors considering adding real estate to their portfolio must search beyond the fleeting promise of short term gains and choose investments with a long term goal of diversification in mind, such as REIT ETFs. (To see if REITs are the investment for you, read The REIT Way.)
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