Real-estate can diversify a portfolio of stocks, bonds and cash, but the real estate industry is not always easy to invest in-which is why a number of financial consultants suggest real estate investment trusts (REITs) to suitable investors. Even though variation into REITS can't protect against a loss, it can potentially reduce the general volatility of your portfolio. This, along with earnings REITS potentially be attractive for a lot of retirees- making REITs an increasingly appealing method for retirees to calculate retirement earnings plus growth.
First of all, let's review what REITs are-investment vehicles that pool investors' money to purchase properties, and generally spend the majority of their earnings in dividends. Some REITs also loan on properties. When you calculate retirement earnings with REITs, these that lend cash will have a tendency to pay greater dividends than those that own property. However, these that own property have the opportunity for development in the share price.
There are two types of REITs: public and private. Public REITs are openly owned companies and exchanged on the main exchanges just as with any share of stock. Private REITS-also called non-traded REITs, public non listed REITs and non-publicly-traded REITs-don't fluctuate in price. The share price of a private REIT is defined by the sponsor. The REIT stays in existence for some time, usually about 10 years. Investors then cash out through an initial public offering, a combination, or a liquidation of the properties.
So let's say you are interested in REITs, but don't know which kind is suitable for you. It may rely on what's more essential to you: Income or liquidity.
Private REITs provide potentially reduced unpredictability and potentially greater revenue-either desirable for a lot of pensioners. Simply because they are not exchange-traded, private REITs aren't susceptible to the daily variances of the market, as public REITS are. And as outlined by BusinessWeek, dividends for private REITs ranged from six % to 7 percent as of early 2006, compared to an average 4.7 % for public REITs.one
On the other hand, there are a few major problems with private REITs-particularly, financial transparency and liquidity. When you calculate retirement assets which you have at any point in time, you do not know what your shares of the private REIT are truly value. To understand the worth of public REIT shares, simply look in the day-to-day publication or your favorite stock quotation website.
Public REITs must conform with the requirements of the Sarbanes-Oxley Act, which includes quarterly monetary reporting; private REITs are required to do little in the way of disclosure apart from file an preliminary offering enrollment with the Securities and Exchange Com-mission (SEC).
And, with private REITs, redemptions are generally accepted after 2 or 3 years from the date of the first purchase. Private REITs may even limit buyer redemptions: For example, in August 2004, Wells Real Estate Funds declared that it would only honor redemption demands resulting from the shareholder's death. This makes public REITs much more appealing to investors who wish to cash out with the click of a mouse (or perhaps a phone call to their agent). Whenever you calculate retirement assets requirements (not all of your funds have to be liquid), keep this liquidity distinction in mind.
Of course, as with any investments, REITs present risks. You will find unique risks related with an investment in real estate, including credit danger, rate of interest variances and the impact of various financial conditions. If you have bought a home over the past ten years, you are well familiar with real state booms and busts.
In general, elements that should be considered whenever investing in any REITs consist of the location and kind of the properties the REIT holds; the economics of those properties; the experience and expertise of the management team; the economic terms of the REIT investment; and your individual monetary conditions and goals as they coincide with how you will calculate retirement needs.
Resource: Business Week, as of 2/13/06 ).