Alternatives in Real Estate
by Sidney J. Ruth, CPA/CFP®

Many individuals are attracted to the benefits of investing in real estate. These benefits include current income and capital gain potential. As we are all aware, direct investment in real estate can require large amounts of initial capital, as well as the time and expertise to properly manage real estate properties. At times, the cyclical nature of real estate can also make these investments difficult to sell and very illiquid.

One alternative to direct real estate investment is the real estate investment trust (REIT)*. REITs allow investors, with significantly less up-front capital and/or time constraints, to share in both the risks and rewards of real estate investing.

What is a REIT?
A REIT is a company that owns, and in most cases, operates income-producing real estate. To be a REIT, a company must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. Full-time managers conduct the day-to-day operations of a REIT. Most REITs focus on particular types of commercial development. These projects range from apartments to shopping centers to office complexes to hospitals and a variety of other commercial projects, where the REIT collects rental fees from the property tenants.

Benefits and Risks Associated with REITs
Because REITs must pay out almost all of their taxable income to shareholders, investors look to REITs for reliable and significant dividends. REITs are also an attractive diversification tool for an investment portfolio due to their historical low correlation to other stocks and bonds. Another potential benefit with REITs occurs if the underlying real estate appreciates in value. In this case, shareholders may benefit from the capital gain from the profitable sale of the real estate assets.

Like any other investment, REITs are not without risks. The value of shares in publicly traded REITs can fluctuate. An investor who sells shares in a REIT could receive more or less than the original price. Other factors that can contribute to risk in REIT assets include: the general level of real estate property values, REIT dividend payouts, management skill, interest rate fluctuations, and broad market trends.

REITs are not for everyone, but they are an option worth exploring for investors looking to add income and diversification to their investment portfolios. Call your advisor at FIFS to evaluate the appropriateness of real estate in your asset allocation program.

*In order to purchase shares of a non-traded REIT, an investor must meet financial suitability standards of typically either $45,000 in gross annual income and $45,000 net worth or $150,000 minimum net worth. Specific State suitability requirements may apply. Any discussion of a specific investment must be accompanied by a prospectus, which discusses the associated risks, charges, and expenses. Investing in REITs can be speculative, lack liquidity, and involve fees. May not be suitable for all investors.

Investment advisor representative of Investment Advisors, a registered investment advisor and a division of ProEquities, Inc. Securities offered through ProEquities, Inc., a registered broker-dealer. Member NASD and SIPC. Franconia Insurance & Financial Services is independent from ProEquities, Inc.

FIFS Connection, Spring 2007, Vol.4, No.2