Penn Wealth Publishing

2016.04.10 Journal of Wealth & Success Vol 4 Issue 5

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10 wealth & success volume 4 issue 5 april 10, 2016 wealth & success Copyright 2016. All Rights Reserved. investment intelligence Investing in REITs Shrouded in mystery, these misunderstood creatures might just provide you with golden eggs If you want to make a would-be investor tune out of a conversation on finance, start throwing acronyms around. After all, it took Americans decades to get used to the concept of an open-ended mutual fund, then some bizarre offshoots called UITs and ETFs came along. Or try this one on for size: how about investing in an industry that has an odd acronym as its very name—the "REIT." Telling Joe and Martha Saver what this stands for—real estate investment trust—only makes mat- ter worse. For some reason the word "trust" makes many people think of polo ponies and powder blue seersucker suits. That's too bad, because not only is purchasing a REIT as simple as buying some Apple stock, it might just provide investors with the mother of all income streams. Before we get ahead of ourselves, let's be clear that blindly investing in REITs is fraught with danger. Do you think there are any shady characters in real estate? And researching the companies them- selves requires a familiarity with terms unique to the industry. For example, instead of looking at gross revenue, you need to gauge a trust's FFO, or funds from operations. This metric measures the per- formance of a REIT without the accounting distortions that would otherwise be pres- ent. And don't dare be fooled by a big fat payout—many micro-cap REITs teetering on insolvency have enticed investors by dangling a near double-digit dividend yield. REITs have certainly come a long way since their inception —a few dozen are actually members of the S&P 500 — but investors need to know what they are getting into, and that begins with a basic understanding of the instrument. So, what is a REIT, anyway? Quite simply, a REIT is a company that owns or finances income-producing real estate. In the "old days," it took a lot of capital to invest in real estate. Today, an investor can purchase shares of a pub- licly-traded real estate investment trust and immediately take ownership of a highly-liquid stake in hundreds of prop- erties, managed by a professional team of industry experts. Not only do most REITs provide a steady stream of income for shareholders, they also provide certain tax advantages. Much like a mutual fund, investors can invest even small amounts in REITs focus- ing on specific industries or specialties. For example, office REITs own and manage

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