Real Estate Investing

Real Estate Investment Trusts, or REITs, have long been considered a good way to open the real estate investment playing field to everyone, even those who prefer low-risk investments. However, there are some things to know before joining an REIT and remember that timing is everything.

As defined by Mortgage News Daily, an REIT is:

“…an unincorporated association of investors who pool their resources to invest in real estate projects and share the associated profits and losses.”

REIT assets and liabilities are typically managed by one person, a board member or trustee. Projects backed by REITs are typically larger endeavors like retail complexes, office buildings, condominiums or apartment buildings. There are three basic kinds of REITs. The equity approach involves owning and typically renting out property, thus managing and hopefully building equity. The mortgage approach generates revenue from the interest off loans issued by the REIT to people wishing to own or invest in property of their own. There is also the hybrid approach, which mixes the equity and mortgage approaches.

The main benefit of REITs could also be viewed as the main drawback. That is the fact that this is a hands-off approach to investing. Once you buy into an REIT, you don’t have control over anything. Of course, anyone who has ever invested into a managed fund has felt the same feeling. With real estate, however, failure to maintain the structure properly or poor construction in the beginning phases can tank the entire project’s reputation. And guess what? Decisions like whether a new roof or new parking lot pavement are needed falls to the board of trustees, not secondary investors. This is why it is probably a good idea to invest through an REIT broker, who knows the ins and outs of these deals and can advise you on your best options.

As mentioned before, timing is everything. That’s true of any investment, but especially real estate. Depending on how you look at it, now might not the right time for a REIT. The Capital Spectator points out that the REIT index just saw a loss of more than 17 percent in 2007, while most other major asset classes improved. Granted, REITs saw seven consecutive good years before this recent decline. However, like the overall real estate market, the REIT slump is predicted to last well into 2008.

“In a recent research note, Citi analyst Jonathan Litt forecasts total REIT returns to be flat to down 10 percent, with most of the losses coming in the first six months of the year,” CNN Money reports.

Some would say it’s time to rebalance the portfolio with healthier investments. Long-term thinkers would say it’s time to maintain real estate investment holdings and possibly even buy more. One thing is certain — anyone investing in REITs right now should be prepared to hold on (in a hands-off way, of course) for the long haul.