Best Practices for Managing REITs in an Investment Portfolio

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Investment portfolios don’t have to be solely composed of stocks and bonds. In fact, individuals should diversify beyond these standard investment options to give themselves more financial stability and resilience. Portfolio managers have to be adept at working with other kinds of investments, including properties.

When an investor wants to delve into the commercial real estate market without personally purchasing a building, he or she can take advantage of real estate investment trusts. REITs, available in both publicly traded and non-traded models, are a promising investment option designed to provide an alternative way into the real estate market that individuals may not have previously considered.

Understanding REITs

REITs are mutual funds that buy up multiple commercial properties and make money from operating these buildings, which may be offices, malls, hotels, condominiums, or other kinds of income-generating locations. As MarketWatch noted, there are more than 300 REITs approved by the Securities and Exchange Commission, and these funds operate over 40,000 properties in the U.S. alone.

Investopedia explained that REITs have existed since 1960, when the Cigar Excise Tax Extension was amended to allow for this new kind of investment. Individual funds can focus on specific industries, such as hospitality, offices, or medical facilities. Some trusts, however, are based on owning a diverse selection of commercial spaces. The basic way REITs earn money involves simply owning buildings and renting them to tenants. Income from rent becomes shareholder dividends.

Investors often find REITs are following different trends than other investments. This makes these investment vehicles an important guard against volatility in the overall stock market. Even when a downturn strikes stocks and bonds, REITs may become a portfolio’s essential source of returns. With that said, there is a great deal of inherent vulnerability in REIT investment, at least in the short term. MarketWatch noted the funds tend to rise and fall in demand, and that returns can vary a great deal over time. Long-term trends are much more stable and positive than short-term performance.

REIT-targeted regulations

To qualify as a REIT, a fund must meet a relatively stringent list of criteria. Investopedia noted all of these funds must invest 75 percent more of assets in properties, cash, or treasuries. Furthermore, REITs must pay out at least 90 percent of annual taxable income to shareholders. REITs pay corporate taxes, and must have at least 100 shareholders one year after their founding. Boards of directors or trustees lead these investment vehicles.

The nature of an REIT varies depending on whether it is traded. Public REITs may be traded or non-traded, which determines whether they are listed on stock exchanges for individuals to buy shares in. In either case, these public entities are registered with the SEC. Investopedia explained there are also privately held REITs that are not registered with the agency. The commission itself warned investors to think carefully before investing in funds it has not approved.

The SEC also pointed out some of the special rules that apply to non-traded REITs, such as regulations that demand public REITs disclose the value of their shares. This is not the case for non-traded funds, which may go 18 months after their initial offerings before disclosing estimated share prices. Furthermore, proceeds and borrowings may be used to pay dividends to shareholders in non-traded REITs. While these high returns may be welcomed by shareholders, they also potentially cut into the value of the REITs’ shares.

The role of portfolio managers

One of the major responsibilities of a portfolio manager when dealing with REITs is educating their clients on the options and advantages surrounding these sometimes-overlooked investments. Fidelity explained that while institutional investors are deeply involved with REITs, single buyers of stocks tend to have less exposure to the real estate market. This is especially true of people who actively manage their portfolios, with passive investors potentially better exposed to REITs.

Real estate portfolio management has its own set of tactics and best practices, and tracking the behavior of commercial properties over time will reveal unique patterns. As Fidelity pointed out, there is a difference between owning shares in a fund that specializes in shopping centers and one focused on the health care industry. The former may thrive when interest rates are on the rise as customers seek the value from companies in shopping centers. The latter is a reliable earner in all economic climates, with leases issued on a long-term basis.

Managing a portfolio with REITs means understanding the sometimes-volatile nature of these investment items, with commercial real estate occasionally behaving much like other stocks, and moving in the opposite direction at other times. No matter how the overall stock market is behaving, REITs may represent a sound choice of investment, as they are a rare chance for individual investors to take an interest in commercial properties.

Becoming a portfolio manager is a promising career path—the U.S. Bureau of Labor Statistics explained the number of personal financial advisors employed in the U.S. is likely to rise 15 percent over a decade. That growth is much higher than the 7 percent for all professions. The median pay for the role was $90,640 in 2017.

Pursuing an Online MSF degree

Financial professionals approaching the complex world of REIT management can increase their knowledge and expertise by seeking an Online Master of Science in Finance. Courses offered on convenient and accessible schedules allow working professionals to study for these new credentials while serving in their present roles. Northeastern University’s Online MSF covers a wide variety of investment-based topics, from the policies and precedents at the root of the financial system to the particulars of trading in today’s markets.

Northeastern’s Online MSF offers two tracks of study: Investment Finance and Corporate Finance. The Investment Finance track focuses on portfolio management in all its many forms. Courses such as Real Estate Finance and Investment and Portfolio Management allow expert faculty members to share up-to-the-moment insights about effective investment.

Students emerge from the Investment Finance Track with a thorough understanding of the best ways to perform risk-return analysis, how diversification of a portfolio works, the theory behind property valuation, and much more. Advising individual and corporate investors on their portfolio management practices comes with high-level responsibility, and Online MSF graduates are well-equipped to take on this task.

To learn more about Northeastern University’s Online MSF program, visit the program page or contact an admissions advisor today.

Recommended Readings:
What can you do with a master’s degree in finance?
Learning about real estate finance

Sources:
Northeastern University’s Online Master of Science in Finance
U.S. Securities and Exchange Commission – Real Estate Investment Trusts (REITs)
MarketWatch – 10 things you need to know about REITs
Investopedia – Real Estate Investment Trust – REIT
Fidelity – REIT Stocks: An Underutilized Portfolio Diversifier
Investopedia – A career in real estate portfolio management
Seeking Alpha –REIT Portfolio Risk ManagementU.S. Bureau of Labor Statistics – Personal Financial Advisors