Real Estate Investment Trusts: The good, bad and realistic

By Dian Vujovich

I ran across a story about REITS at YahooFinance this morning. The piece had a catchy title, ” Investing in Real Estate Without Buying Property“, and the authors made some good points. Those points, however, weren’t nearly as interesting as the comments the story received from online readers but more on that later.

We all know that there is only so much land around and that real estate investing has been quite lucrative for buyers and investors at various times throughout our U.S. history.

We also know that when to purchase a property—or sell one—can be tricky. And that market bubbles can turn a hopeful real estate investment into an underwater mess. I’ve seen prices of condos in my small community fall from $220,000 to $35,000 and back up to $80,000-ish over the past six years. As a result of that fall, investors rather than individual home buyers more often than not were the purchasers on many of the available properties in my community. Ugh!

Nonetheless, since making money is what seems to matter most in the current world, real estate has had and will always offer that opportunity. But part of this earthly deal comes profitable and not-so profitable investment cycles.

In the story referenced earlier, Phil DeMuth of Conservative Wealth Management explained why REITS were created: “They were created by Congress in 1960 to give all Americans – not just the affluent – the opportunity to invest in income-producing real estate in a manner similar to how many Americans invest in stocks and bonds through mutual funds.”

Given that not all REITS are created equally, some invest in commercial properties, others residential ones, etc., the one thing they have in common is a management company cares for the properties in a REIT, collects rents and then passes income on to its shareholders.

The REIT world is huge: REIT.com reports that there are over 160 different REITS that trade on the NYSE with an estimated value of $650 billion. None of them are risk ever free-free.

DeMuth said that since 2009 real estate has been the best performing asset class around gaining almost 200 percent since that time. “It has been very hot, so you have to be aware that while it has momentum on its side, the valuations have also gotten very high.”

But enough of all of that. The wisdom in this REIT blog  might be found in reader responses like these:

•From Spiderman:    “Well, it seems to me like these articles always appear at top of a market run, and they plant these stories to suck you in to buy while they plan their exit. My two cents.”

•From Youargue.com: ” REITs are so overbought it is ridiculous. Good luck getting more than a 3% yield”

•From Christa:  ”A REIT is just a property mutual fund. I prefer to buy tax certificates.”

•From Richarda: ”There is a difference between equity REITS, which actually own and lease property, and mortgage REITS which primarily deal with paper mortgages.”

•From Big Duff:”Excuse me. I have some REITS that I have had for a number of years, that did give a fair return, but returns have been going South just like everything else! Unfortunately so has the value of the stock! In addition buy backs of the stock are almost impossible. My advice is beware.”

• And finally from Patrick B : “Low cost, less risk with R.E. index funds. Vanguard”