Even so, investors should be very selective about dipping into REITs. Financial adviser Chris Long, CEO of Chicago’s Long & Associates, recommends putting your eggs in several baskets with a REIT index fund, which can be best accessed via an exchange-traded fund or ETF. “It’s very difficult to predict which individual REITs are going to perform well over the long run,” he says.
Long offers three keys
to researching a REIT investment:
Know your risk tolerance.
Given the realities of the current real estate market, REITs can be volatile. For example, Long points out the Vanguard REIT index mutual fund poor performance in 2008. In 2009, it experienced a 30% rise because real estate prices began to appreciate. REITs will likely be volatile over the next few years. To get the best idea of a particular fund’s consistent long-term performance, says Long, review the fund’s five- to 10-year history.
Understand the different types of REIT funds.
Some REIT funds base their return on rental income from properties they invest in. “Those tend to be a little more stable, in a sense, because they’re a little less speculative,” says Long. Other funds invest in properties that appear undervalued. These funds operate on a buy-and-hold strategy. The profit comes from selling the fund. Says Long, “That’s a more speculative fund.”
The greatest advantage of investing in index funds in general is that they carry lower fees than mutual funds. Index funds have a lower management ratio expense because they aren’t actively managed in the same manner as mutual funds. “Within a category of funds, the single biggest determinant of performance is expense ratio,” says Long. “The higher the expense ratio, the better the fund must do to maximize an investor’s return.” Long recommends that investors find a fund with an expense ratio under 0.5%.
–Additional reporting by Renita Burns