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Hybrid REIT Investing in 2014

REITReal estate investing is complicated by several constraints. The liquidity required to be competitive for many deals is beyond smaller investors. Those who rely on financing are at a disadvantage to cash buyers. A market savvy to recognize hidden potential and use negotiating skills often takes time to acquire.

So, how can investors gain exposure to this attractive asset class without owning property? The most convenient and affordable solution may be hybrid REITs (real estate investment trusts).

These publicly traded securities are corporations that lend money to real estate investors and also collect rent from tenants. Since real estate is a volatile asset class, the separate revenue sources helps diversify risk. As mortgage rates rise, vacancy rates in rental units may decline. When property markets are surging, hybrid portfolios can capitalize on mortgage booms.

Why REITs May Appeal to You:

Passive Income:

REITs pay monthly or quarterly dividends. Yields of over 6% for North American REITS and over 10% for some global choices are appealing to income starved investors in 2014. The large yield spread to risk free treasuries also provides a dividend alternative to equities in traditional sectors. Elliott Broidy and many investment managers may turn to REITs for increased yield and access to particular real estate markets.

Negative Correlation:

Strong performance across major indices in the U.S. has many investors chasing performance. As a result, many investors own dividend stocks that move in tandem with the broader market. Real estate tends to move separately from equity markets, which adds negative correlation to your dividend portfolio.

Much like Canadian mining stocks; REITs allow investors to access an asset class with high barriers to entry. Elliott Broidy and many investment managers consider REITs for quick access to particular real estate markets.

Liquidity and Diversification:

REITs are liquid investments. Unlike the listing and closing process of real estate, you can readily sell shares. You can also quickly diversify into overseas markets or real estate sectors in ways that are not otherwise possible. This includes countries that restrict direct investment in real estate.

REIT Investing Strategies to Consider in the New Year:

Demographic and Healthcare Trends:

Healthcare has dominated headlines in recent years. Recent overhauls in America’s private insurance scheme are bringing added attention to healthcare stocks. Hybrid REITs that invest in medical facilities can increase your exposure to healthcare trends in a dynamic way. You could choose from real estate portfolios with senior care facilities, hospitals or urgent care doctors.

Given the negative correlation of real estate to stocks, you can benefit from divergent trends in equity and real estate performance. From an income standpoint, you should focus on REITs with a stable dividend history through different market cycles. If you plan to reinvest dividends, steady payouts may correlate with lower volatility, as well.

Currency Adjusted Returns and International REITs:

A weak American dollar and sagging Canadian loonie mean dividends from some foreign REITs are boosted when converted. The future of fiscal stimulus in American is uncertain, while talk of Fed tapering in Canada is lowering expectations of a currency rebound. You can review the country exposure of overseas REITs to understand the currency exposure.

Foreign exchange risk is one of several considerations when evaluating investments. However, understanding how currency values affect returns helps make better investment decisions. Reinvesting dividends? Your capital appreciation is also increased in dollar adjusted terms.

Summary-Low Cost and Passive Income on a Budget:

Dividend investing can be a crucial aspect of an overall portfolio strategy. While the extent to which yield is a part of your portfolio depends on unique factors, REITs appeal to a wide array of time horizons and risk tolerances.

About The Author: Marc Walambe is a personal finance writer with over 13 years of experience in asset management and investment advisory services. He specializes in money savvy strategies to increase the return on investment for everyday spending choices.

Image courtesy of cooldesign / FreeDigitalPhotos.net

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2 Responses to "Hybrid REIT Investing in 2014"

  1. Matt says:

    I have been in and out of a couple different REITs in the past year or two and am in the process of educating myself further in order to make an informed buying decision in the near future. I like REITs and consider them an important part of a mature portfolio. For me, I’m giving a hard look to health care REITs and the opportunities that exist in that industry. I see health care REITs offering a lot of growth in the next 10+ years.
    Your argument about REITs allowing individual investors to overcome some of the barriers to entry into the real estate game is a good point – I hadn’t considered that before but I do agree with you.
    One question on REITs: do you consider the special tax situations attached to REITs when making your REIT investments?

    • Guest says:

      Hello Matt,

      Investors who do not need income may consider REITs for tax deferred accounts, given the taxable income that these securities can pay out.

      For those who plan to receive dividends, tax loss harvesting and donating appreciated stock to charities are ways to reduce AGI for income tax purposes.

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