Look At REITs From All Angles

Although it can vary according to client, Miceli says, REITs often make up about 8% of a clients portfolio. What is important, he continues, is “to be consistent in what you do.”

Steven Wightman, a certified financial planner with Wightman Financial Network, LLC, in Lexington, Mass., applies 2 philosophies when considering REITs: investing in the class as part of a strategy of diversifying a client across assets and, consequently, spreading those classes of risks; and dollar-cost averaging.

“Real estate has gone up tremendously in value and there have been very few bad years,” he says. It makes sense to buy in over time, he continues.

To achieve this end, Wightman says he uses exchange traded funds that offer low risk and a high return with an expense ratio of 30 basis points.

“We dont have a cookie-cutter portfolio,” Wightman says, and REITs as a percentage of a clients portfolio depend on that clients situation. For example, he says that if a client owns a home and a couple of apartment houses, then REITs might not be an appropriate investment.

But, if it is appropriate, then REITs offer other advantages, he says. For example, they are like stocks in that they are not taxed until they are sold, he says, and like stocks, they can be transferred to a child.

And, according to Wightman, although like any investment class, there might be a downward rotation in the class, “interest rates are going up gingerly and modestly. The Fed has been sensitive on the throttle.”

But he also notes the importance of diversification, particularly if you are going to need the money in a year or two. So, if you are going to need money for retirement, this has to be a factor that you keep in mind, Wightman says.

Richard Crouse, a certified financial planner and president of GVC Financial Inc., Altamonte Springs, Fla., also stresses the importance of diversification.

His guideline is that no more than 20% of an investment portfolio should be in real estate including REITs, he says. That 20% would not include a clients home, he continues. He notes that 20% would be on the high end of the spectrum.

He also believes in diversifying the portfolio as well as the type of REIT within the portfolio, particularly if there is a fairly low leverage, for example, 30%. In such cases, it is important to make sure there is sector or geographical diversification because you have more equity in those programs, according to Crouse. He says it can be beneficial to be in 2 or 3 REIT sectors. “Diversification brings flexibility and I like flexibility. Im old school,” says Crouse.

Crouse also says he uses unlisted REITs, or REITs that are not registered by trade daily, because there is less volatility than with publicly traded REITs. With publicly traded REITs, he says, investors often buy for yield and when interest rates rise, they sell them. “For a long-term buy and hold person, an unlisted REIT can be a good investment,” he adds. “It offers a more stable NAV [net asset value] stream,” he says.

Reproduced from National Underwriter Edition, January 27, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.