Recs

6

Is It Time to Buy REITs?

When everyone's hyping an investment, it's a good idea to stay clear. But after the hysteria ends and everyone moves on to the next big thing, smart investors will check out the wreckage to look for bargains.

Real estate investment trusts (REIT) certainly qualify as a once-hyped investment that has fallen from grace. Just a year ago, the Fool's Rule Your Retirement newsletter interviewed REIT expert Ralph Block to discuss whether returns that had exceeded 30% annually from 2004 to 2006 could continue. Since February, however, the Vanguard REIT Index ETF (AMEX: VNQ  ) has fallen more than 20%, and REITs that focus on certain sectors, like mortgage REITs Thornburg Mortgage (NYSE: TMA  ) and Apartment Investment & Management (NYSE: AIV  ) , have gotten hurt far worse.

More than mortgages
With the housing slump in full force, anything with the words "real estate" in it has gotten the cold shoulder from most investors lately. Just this past Tuesday, REIT shares got slammed in the wake of the Fed's decision to cut rates by only a quarter point. Apartment managers AvalonBay Communities (NYSE: AVB  ) and Equity Residential (NYSE: EQR  ) have fallen 9% and 12%, respectively, in just three days.

It's important to remember, however, that not all REITs focus on residential real estate. Many REITs focus on various aspects of commercial real estate management, from retail store and shopping mall REITs like Simon Property Group (NYSE: SPG  ) to business office space REITs such as Vornado Realty Trust (NYSE: VNO  ) . So far, business conditions in these other sectors have held up fairly well, although some fear that the housing slump will spread to commercial real estate over time, especially if credit availability remains tight.

Think long-term
In the interview, Block argued that much of the strong performance from REITs in recent years resulted from investors reevaluating the value of real estate investments. In an environment where bond yields were extremely low and credit was freely available, the much higher payouts offered by REITs were too good to last. As a result, even after REIT prices ran up, they still compared favorably with other income-producing investments.

Now, even after a significant drop, there's still no guarantee that REITs have hit bottom. Low interest rates should once again provide some support, but if investors expect that the properties REITs own will lose value, they won't be in a hurry to buy a depreciating investment.

For average investors saving for long-term goals like retirement, however, holding a small fraction of your assets in REITs has some benefits. REITs add diversification to the income-producing side of your portfolio, while also including the potential for long-term price appreciation that real estate offers. Unless you think the U.S. real estate market is in line for a long-term decline -- like the drop in Japanese land prices from 1990 to 2005 -- investing in REITs through a mutual fund or ETF makes sense to me.

See these articles to learn more about:


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 554144, ~/Articles/ArticleHandler.aspx, 10/21/2014 5:27:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,399.67 19.26 0.12%
S&P 500 1,904.01 17.25 0.91%
NASD 4,316.07 57.64 1.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/20/2014 4:08 PM
AIV $34.03 Up +0.52 +1.55%
Apartment Investme… CAPS Rating: **
AVB $150.35 Up +0.98 +0.66%
AvalonBay Communit… CAPS Rating: *
EQR $67.19 Up +1.29 +1.96%
Equity Residential CAPS Rating: ***
SPG $170.35 Up +1.93 +1.15%
Simon Property Gro… CAPS Rating: *
TMA $0.24 Down +0.00 +0.00%
Thornburg Mortgage… CAPS Rating: *
VNO $105.98 Up +1.31 +1.25%
Vornado Realty Tru… CAPS Rating: *
VNQ $75.81 Up +1.14 +1.53%
Vanguard REIT ETF CAPS Rating: ****

Advertisement