Adding REITs to Prepare for the Worst

If you have been reading this blog; then you probably know by now that I am fairly confident that another large recession is on the horizon, unless certain legislative and monetary actions are implemented by the Federal Reserve or Congress to avert the next financial pullback. One area I have been exploring are REITs.

A REIT is a Real Estate Investment Trust. They are often publicly traded entities that take cash from investors and use that cash to purchase and manage real estate. Every REIT is different and their shareholder advisories state the type of real estate the REIT will invest in. Real Estate does not have a direct correlation to the stock market; there is some relation, but it’s not one for one. Therefore, real estate can provide a safe haven during times of crisis. REITs failed in 2007 due to the contraction of credit and many REIT’s were over leveraged. What over leveraged means is let’s say the normal practice of buying a $100 building is putting up $25 of your own money and borrowing $75. REITs were borrowing $95 in 2007 and putting up $5. Many have since abandoned this practice since the crash.

REITs were founded as an answer to American demands for real estate investment. Without a REIT; if you want to invest in real estate; you need to buy a piece of property and then either manage it or pay someone to manage it. This sounds easy, but it is substantial work; in fact real estate investing in this capacity is often considered a business because of how involved it is. The only other option before REITs was to find a closed ended investment pool. This is where groups of people would get together and pool their real estate and purchase property. These types of investments are still very prevalent through companies like Fundrise or Cardone Capital.

One particular REIT that has my interest is Simon property(NYSE: SPG). They own many malls and their balance sheet is proving to be exceptionally strong. Another REIT that I own is Realty Income Trust (NYSE:O). REITs can provide much needed diversification to any portfolio.

A word of caution. Some REITs send K-1s and not 1099’s; some, like SPG can be either depending on whether you are invested in the company directly or the Limited groups’s holding company. I’m not going to lie; K-1s can be a nightmare at tax time; and solely because, take Simon as an example, they do not send them until July. So if you hold a REIT that issues a K-1; then you will often not be able to file your taxes until after the April 15th deadline; which can be a problem for many.

So think about REITs and how they can fit into your overall financial plan.

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