No, absolutely not. 

 

You might consider a high quality commercial Real Estate Investment Trust (REIT).

 

“WAIT!   I heard on the news that commercial real estate is in jeopardy.  Why on earth would I invest in commercial real estate today?”

 

Because many commercial real estate loans are set to adjust to higher rates in the coming years, some of those properties may have to be sold. 

 

Simple economics: when supply increases, price decreases.

 

Some professionals are predicting that there may well be fire sales on commercial real estate that must be sold. 

 

 

So why does it make sense to invest in a commercial REIT today?

The people who make the most of this opportunity will be the ones who have cash.  Many private REITs are scrambling to raise capital so that they can be the winners. 

That’s why it might make sense to take a portion of your portfolio and invest in a private REIT if it is suitable.

Don’t get me wrong.  Annuities can be a great tool to “insure” a portion of someone’s assets and create an income stream, but it is not the only tool.  While annuities can offer investors a guarantee, backed by the claims paying ability of the insurance company, many investors are not as interested in the guarantee feature of annuities.†

Another product that is popular among investors is an FDIC-insured bank CD.  However, many investors are looking for a stream of income that, at least currently, is higher than typical bank certificate of deposit (CD) rates when held to maturity.  I have had many of my clients complain that CD rates are barely keeping up with inflation.  The real fear is that over time there is a shrinking effect on their accounts due to inflation.

That’s where REITs can play a role.  But you must understand that a REIT is not guaranteed to provide income.  It is possible to lose your entire investment in a REIT. 

Before you dive in with REITs you must understand the terminology that differentiates various kinds of REITS.  There are public and private REITs: commercial, residential, and mixed REITs; publicly traded and non-traded REITs; as well as others.  Make sure that you understand the distinctions before you purchase.

A publicly traded REIT is one that is listed on a national exchange or a quotation service like the NASDAQ.  They are registered with the Securities and Exchange Commission (SEC) and required to file quarterly and annual reports.  While the trading on an exchange or quotation service provides liquidity and an easy way to buy or sell shares, it also means that the share price can be subject to the same forces that create volatility in the share price.

The major distinguishing factor of a private, non-traded REIT is that it cannot be purchased or sold on a publicly traded exchange like the New York Stock Exchange or the NASDAQ.  The value of the non-traded REIT shares is determined by factors including, but not limited to, the value of assets owned by the REIT. 

I will limit my discussion here today to the domain of private, non-traded REITs because it is my personal belief that they offer the greatest potential benefits.  You will note that I often use the term “potential” and that’s because these benefits are never guaranteed.  Do not buy one of these products from someone who fails to adequately explain the risks involved.

One potential benefit of this investment is diversification.  Many investment professionals consider non-traded REITs to provide a counter balance to a portfolio.  They typically are not closely tied to the movements of the US stock market.  Because of that lack of correlation with the US stock market they may help smooth out the volatility experienced in a portfolio.  It is important to remember that diversification and reduction of correlation among asset classes in a portfolio does not ensure a profit or necessarily protect against loss.

 

There is also the possibility of tax advantages for this investment.  The tax treatment of some REITs can be at least partially at long term capital gain rates.  The reason for this is that the REIT can often reduce taxable income with depreciation deductions.  Ultimately, when the asset is sold, the income protected by the deductions will be taxed at potentially lower long term capital gain rates.    Depending on your tax bracket this may be advantageous.  As a contrast, the income derived from fixed annuities is taxed at ordinary income rates.

Another potential benefit is hedge that real estate can provide against inflation.  Real estate investments can lose value and certainly in some areas that value may never be recovered, however over the long term real estate is generally considered an investment that keeps up with inflation.  While annuities can offer inflation protection as well, that is a rider that must be purchased at an additional cost. 

 

Real Estate investments involve significant risk.  You must have a well thought out strategy to make this investment an effective part of a diversified portfolio. 

 

Not all REITs are built alike and not all REITs deliver the same results.*

 

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DISCLOSURES

 

† Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component.  They are sold only by prospectus.  Guarantees are based on the claims paying ability of the insurer.  Withdrawals made prior to 59 ½ are subject to the 10% IRS penalty tax and surrender charges may apply.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of the investor’s unit, when redeemed, may be worth more or less than their original value. 

 

* Real Estate-based investments such as exchange traded REITs, and real estate limited partnerships derive a significant portion of their value from tangible assets that can moderate their risk profile.  Particular attributes of these investments such as management experience, portfolio quality, debt levels, and portfolio liquidity options affect the overall risk of such investments.  There are special risks involved with investing in non-traded real estate funds that include the absence of a public market for these securities, limited transferability and lack of liquidity, lack of an operating history for earlier stage funds, absence of properties identified for acquisition for earlier stage funds, possibility of substantial delay before or disruption of when distributions are made, variability of distributions, reliance on a fund’s general partners or advisor, payment of significant fees to general partners or advisors and their affiliates, potential conflicts of interest, and lack of diversification in property holdings until significant funds have been raised or invested.