Alternative Investment Class
In a previous post, we explored Dave’s recommended four asset class selections for your investments: growth, growth and income, aggressive growth, and international. If you’d like a refresher, enjoy the quick read here.
These asset classes provide good diversification and exposure for most investors. However, I introduced the alternative asset class towards the end of that post. This class of investments doesn’t fit in the conventional equity, income, or cash categories (hence the name). However, they can provide additional exposure and opportunity when searching for that ever-elusive alpha.
Alternative asset classes come in a variety of flavors and have their own nuances to understand. Consider discussing these with one of our Financial Advisors to determine if they fit your strategy and portfolio well.
Specifics around liquidity, taxes, redemption fees (if present), hold period, NAV (net asset value), and minimum investment requirements have made these more difficult to obtain for the general investor. Certain funds within this class are often only available to high-net-worth individuals. However, we are seeing more and more alternative investment funds maintaining lower QP (qualified purchaser) requirements. We will explore all angles of alternative investment class assets in future posts (including private vs. public equity, a very hot topic right now). Still, for today’s discussion, we’ll focus on REITs.
REIT – Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) have become a popular investment vehicle, offering individuals a unique opportunity to invest in real estate without the burdens of property management. REITs typically own and operate income-producing real estate, such as office buildings, data centers, shopping malls, apartments, student housing, and hotels. Investors can buy shares of publicly traded REITs, similar to stocks, or invest in non-traded REITs through private placements. One of the most enticing aspects of REITs is their potential for high dividends, as they are legally obligated to distribute a significant portion (90%) of their income to shareholders.
Diversification is a significant advantage of investing in REITs. By pooling funds from multiple investors to invest in a portfolio of properties across different sectors and geographic locations, REITs offer investors exposure to a diverse range of real estate assets. This diversification helps reduce the risk associated with investing in individual properties and markets, making REITs an attractive option for those seeking to spread their risk.
Another benefit of investing in public REITs is their liquidity. Unlike owning physical real estate, which can take time and effort to buy or sell, investors can easily buy and sell shares of publicly traded REITs on stock exchanges. This liquidity allows investors to adjust their real estate exposure quickly in response to changing market conditions or investment objectives. Unlike public REITs, private REITs are semi-liquid. In a future post, we’ll explore the differences between public and private REITs.
REITs also offer the potential for capital appreciation. While the primary source of returns for REIT investors is typically dividends, the value of REIT shares can also appreciate over time as the underlying real estate properties increase in value.
This potential for capital appreciation, combined with the steady income from dividends, can make REITs a compelling investment option for both income-oriented and growth-oriented investors. Remember that REITs' tax benefits are also important to consider. As income is distributed, it can be categorized as ordinary income, capital gains, or return of capital. We suggest you consult your tax advisor or our in-house CPA for advice.
As with all investments, it's important to carefully evaluate REITs before investing. Understanding the risks, benefits, and alignment with your strategic goals must be considered. Risks with REITs to consider are changes in interest rates, property values, occupancy rates, and economic conditions. Additionally, not all REITs are created equal, and you should conduct thorough research to understand if this investment class is right for you. Luckily, our team at Whitaker-Myers Wealth Managers has conducted this research and can help determine if this investment class is a good fit for your portfolio.
REIT – Real Estate Investment Trusts
May 13, 2024
Summit Puri
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