Real estate could diversify a portfolio of stocks, bonds and money, however the real-estate industry isn't always easy to invest in-and that's why a number of economic consultants suggest real estate investment trusts (REITs) to suitable investors. Although variation into REITS can't defend against a loss, it can possibly decrease the general volatility of your portfolio. That, along with income REITS possibly be attractive for a lot of retired people- making REITs an increasingly attractive item to include in their retirement financial planning for income plus growth.
First, let's evaluate exactly what REITs are-investment vehicles that pool investors' cash to purchase properties, and usually spend the majority of their earnings in dividends. Some REITs also loan on properties. When you are thinking about retirement financial planning and REITs, these that lend money will have a tendency to pay higher dividends than those that possess property. Nevertheless, these that own property have the opportunity for development in the share cost.
You will find two kinds of REITs: private and public. Public REITs are openly held businesses and exchanged on the main exchanges just as with any share of stock. Private REITS-also called non-traded REITs, public unlisted REITs and non-publicly-traded REITs-don't fluctuate in price. The share cost of a private REIT is set by the sponsor. The REIT stays in existence for some time, typically around 10 years. Buyers then cash out through an initial public offering, a combination, or perhaps a liquidation of the properties.
So let's say you're thinking about REITs, but don't know which type is suitable for you personally. It may rely on what's more essential to you: Earnings or assets.
Private REITs offer potentially lowered volatility and potentially higher income-either attractive for many pensioners. Simply because they aren't exchange-traded, private REITs aren't subject to the every day variances of the industry, as public REITS are. And according to BusinessWeek, dividends for private REITs ranged from six percent to 7 percent as of early 2006, in comparison with an typical 4.7 % for public REITs.one
Nevertheless, there are some major problems with private REITs-especially, financial transparency and liquidity. Whenever you are thinking about retirement financial planning or when you want to calculate retirement assets which you own at any point in time, you do not know what your shares of the private REIT are really value. To understand the worth of public REIT shares, simply look in the daily publication or your preferred stock quotation web site.
Public REITs should comply with the specifications of the Sarbanes-Oxley Act, which includes quarterly financial reporting; private REITs are expected to do little when it comes to disclosure apart from file an preliminary offering registration with the Securities and Exchange Com-mission (SEC).
And, with private REITs, redemptions are usually permitted after two or 3 years from the date of the initial purchase. Private REITs may even restrict buyer redemptions: For example, in August 2004, Wells Real Estate Funds announced that it would solely honor redemption demands as a result of the shareholder's death. This tends to make public REITs much more attractive to investors who want to cash out with the click of a mouse (or a telephone call to their agent). When you are thinking at retirement financial planning and when you calculate retirement liquidity requirements (not all of your funds need to be liquid), maintain this liquidity difference in mind.
In general, factors that should be analyzed whenever investing in any REITs include the location and type of the properties the REIT holds; the financial aspects of these properties; the knowledge and proficiency of the administration team; the financial conditions of the REIT investment; as well as your personal financial circumstances and objectives while they coincide with your retirement financial planning.
Of course, just like any purchases, REITs present dangers. There are unique risks associated with an purchase of real-estate, which includes credit risk, interest rate variances and also the influence of varied financial circumstances. When you have bought a house over the past 10 years, you are very well acquainted with real state booms and busts.
One Resource: Business Week, as of 2/13/06 ).