What Are REIT’s?

As an investment class, real estate offers several major advantages. Real estate is a great inflation hedge, meaning when inflation is high, the value of real estate investments usually increases dramatically. Second, real estate offers several unique tax advantages, such as the ability to deduct interest expense and depreciation. Third, few investors pay 100 percent cash when they buy real estate. Rather, they use leverage (borrow money to fund the investment). This provides the investor the opportunity to benefit from investment gains utilizing borrowed funds. Lastly, real estate investments are often relatively uncorrelated with stock market gains. Thus, owning real estate is a great way to further diversify a portfolio.

However, owning real estate directly has its disadvantages. First, real estate is illiquid, meaning it is difficult to convert into cash quickly. Second, even if the majority of dollars required are loaned to the investor, investing in real estate requires a high minimum investment. Third, investing in real estate involves a large amount of personal liability. Lastly, real estate investments have a high amount of transaction costs, such as commissions, appraisals, and closing costs.

Real estate investment trusts (REITs) provide investors a way to invest in real estate without being exposed to the above disadvantages. REITs are publicly-traded investment corporations that are traded on major stock exchanges such as the NYSE. Being traded on public exchanges provides liquidity to the investment. Further, REIT shares can be purchases with relatively small amounts of money. Also, the investment corporation bears most of the liability, making individual investors’ assets secure from creditors. Lastly, REITs generally purchase many individual properties, providing diversification within a real estate portfolio.

REITs are a great addition to many portfolios. However, keep in mind that for most investors a home is their largest asset. Consequently, investors should be careful not to overweight the real estate portion of their portfolios. In most cases, investors should not invest more than 15 percent of their portfolio in real estate (excluding their home).

About the author

Lon Jefferies, CFP®, MBA
Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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