Real Estate Investment Trusts (“REITs”) Part II


By Paul Ohanian


In last month’s Journal, I touched on the basics of Real Estate Investment Trusts (REITs) as a liquid and flexible alternative to directly holding real property in today’s market. In this issue, I would like to share an actual case study of REITs-driven solutions to give you a clearer perspective of its positive investment returns. First, let’s revisit the two different forms of REITs. A public REIT is bought and sold on an exchange like the NASDAQ or NYSE. A private, or non-publicly traded REIT, is not listed on an exchange. Both are a professionally managed pool of real estate investments – real property, mortgages or a hybrid of both – that collect rent and/or interest on mortgage loans. As REITs must distribute more than 90 percent of net income to retain special tax considerations, many offer regular, often monthly, dividend payments.

Case Study: The “Jones” couple plans to retire in 5 years. They were considering purchasing a second home, but are hesitant to commit the funds because of the current market. Their cash is sitting in a savings account earning less than 1%.

Solution 1: Invest $100,000 in a publicly traded REIT

Public REITs are listed on stock exchanges, but perform closer in line with real estate markets than equities markets. Publicly traded REITs should not be shopped for like a piece of stock. It is more important to be less focused in the daily movements of the share price and more focused in a REIT that will produce a steady, monthly dividend. For the Jones couple, this translates to a 4.5% or $375, monthly dividend on a $100,000 investment, versus less than $100 sitting in their savings account. Another consideration is the asset class of the REIT’s holdings, since real estate sectors perform on their own unique cycles. In this Solution, a global REIT index fund is a good match for Mr. and Mrs. Jones and adds diversification to their portfolio. And since this REIT is publicly traded, it can be liquidated easily when and if they need funds.

Solution 2: Invest $100,000 in a non-publicly-traded (private) REIT

Since private REITs do not trade on the exchanges, it may be a good strategy to review the secondary REIT market for opportunity – many sellers and few buyers. By purchasing a private REIT, the Jones couple lose the liquidity outlined in Solution 1 and would have to work harder to find a buyer should they choose to sell. However, at the time of purchase they benefit from discounts to par value that are often substantial and offered by sellers eager to trade. For Mr. and Mrs. Jones, I identified a domestic, multi-unit residential REIT producing a 4.5% or $375, monthly dividend at a 20 percent discount to par. Management announced it intends to take the REIT public within 12 months and we would plan to hold the investment at least that long, gaining back the liquidity that comes with open trading.

The Jones couple weren’t ready to invest in real property, but having their funds sit in a bank account was not a lucrative alternative. Investing in a REIT, allows them to create a positive financial return in real estate while giving them the flexibility to get to their funds if and when they decide to move forward to purchase their second home. Without an immediate need for cash, Mr. and Mrs. Jones decided to pursue Solution 2.  The Jones couple should begin to receive their first dividend payment soon.

Paul Ohanian, is founder and CEO of Scottsdale Wealth Planning, Inc., an Old Town-based registered investment advisor, and Certified Financial Planner® with more than 25 years of experience providing financial services to the Valley.
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Information contained in this article is for informational purposes only and should not be considered investment advice nor a specific recommendation to purchase or sell any product. This is not a recommendation to purchase real estate investment trusts (“REITs”). An investment in a REIT may not be suitable for all investors. Advice may only be provided after entering into an advisory agreement. Additional information on the services of Scottsdale Wealth Planning can be found in its current Form ADV2A which is provided to all prospective clients in advance of entering into an advisory agreement. Please note that information contained herein is at a period in time and subject to change without notice.