Real estate investment trusts as an investment


Q: I have an investment portfolio consisting of mutual funds and exchange-traded funds that is diversified into U.S. and foreign stocks and bonds. I have been reading about REITs. Please tell me more about them. Should I add REITs to my portfolio?

A: An REIT (real estate investment trust) is an investment company that owns and operates income-producing real estate (equity REIT) or in some cases lends money directly to real estate owners and operators or indirectly by acquiring loans or mortgage-backed securities (mortgage REITs). Some REITs are publicly traded on major stock exchanges, some are publicly registered but not traded, and some are private companies.

REITs are taxable corporations with a special tax status that requires the company to invest at least 75percent of its total assets in real estate assets and cash and derive at least 75 percent of its gross income from real estate-related sources including rents from real property and interest on mortgages. REITS must also distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

Through REITs, individual investors like you gain an opportunity to invest in large-scale commercial properties that you normally would not have access to, such as shopping centers, health care facilities, office buildings, apartments, regional malls, manufactured homes, industrial parks, self-storage units, timber, lodging and resorts, and mortgages.

The easiest and most prudent

way for you as an individual investor to include REITs in your investment portfolio is through a mutual fund or an exchange-traded fund, and there are many choices.

Some are actively managed and some are passive REIT index funds; some hold REITs in foreign countries including Singapore, Australia, France, Canada, Japan, and the United Kingdom.

Adding a REIT fund to your portfolio of stock and bond mutual funds will provide you with greater diversification and the potential for a greater long-term average return with less volatility.

In six out of the past ten years, REITs outperformed large and small company U.S. stocks, bonds, international stocks, and commodities. Over the 20-year period from 1992 through 2011 REITs yielded an annualized return of 10.9percent, beating oil(8.6percent),

the S&P 500 (7.8 percent), gold (7.6percent), bonds (6.5percent), international stocks (4.0 percent), inflation (2.5 percent) and homes (2.5percent).

The National Association of Real Estate Investment Trusts said that over the last 40 years publicly traded Equity REITs yielded a compound annual total return of 12.01 percent per year. Nobody knows what the future holds, and as you've heard many times, past performance does not predict future results, but the REIT story should encourage you to consider them as a possible additional asset class in your portfolio.

Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth Inc. in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or