in this video we are going to look at
what is a REIT and are they good
investments
a wreath is a real estate investment
trust basically a REIT is a way for the
typical investor to invest in real
estate without having to put up all the
capital needed to invest in real estate
and without having to manage the real
estate itself so much like a mutual fund
a REIT pulls together money from many
investors and instead of investing in
stocks or bonds like a mutual fund does
reapz invest in real estate one
important feature of REITs is that they
do not pay corporate income tax as long
as they pay out at least 90 percent of
their profits in the form of dividends
this has a very nice feature of REITs
typically paying out much higher than
average dividends now there are two
primary types of rece equity REITs and
mortgage REITs if you invest it in
equity read you are essentially
investing in actual real estate there
are equity REITs that buy commercial
properties or residential properties or
hotels and resorts or industrial
properties as you can see no matter what
type of real estate property will
perform well there is likely a REIT that
will specialize in it a mortgage rate on
the other side is a lot like the name
implies mortgage REITs invest in
mortgages or mortgage-backed securities
to make their income so basically they
are the lenders to real estate investors
so our REITs a good investment I
strongly believe that REITs have a place
in many investors portfolios to start if
we look at some of the most popular
asset classes stocks bonds commodities
and real estate reaks are a great way to
get access to real estate investments
without some of the hurdles we mentioned
before involved in typical real estate
investments one important consideration
when investing in REITs in today's
economy is how will rising interest
rates affect reefs I find this is one of
the most common questions well let's
look at mortgage REITs first a mortgage
REIT invests in mortgages and mortgage
acts very similar to a bond in that it
has a steady stream of predictable cash
flows but when rates rise the value of
that mortgage will fall
since its payments are based on old
lower rates but on the other hand new
mortgages will be issued at higher rates
higher rates will provide higher cash
flows for mortgage REITs which should
lead to a higher valuation
so the real consideration is speed if
rates rise slowly then mortgage REIT
managers can adjust their portfolio to
capitalize on the new higher rate
mortgages this belief is backed by
actual data this chart here this is a
chart starting in late 2015 the blue is
the Fed Funds rate the orange line is a
mortgage rate index as you can see by
the blue line this is a start of when
the Fed first started increasing rates
you can see that mortgage REITs have
done fairly well in what would be
classified as a rather slow rising rate
environment but if we look back at
history
the last major rate hike took place in
2004 2006 this chart shows that mortgage
REITs pull back early on likely due to
the anticipated rate hikes and then
after some volatility ended up right
about where they started when rates
actually began to rise now equity REITs
are a completely different animal first
let's consider why rates would rise it
is likely that real estate is doing well
and the government is willing to put a
little bit of pressure on real estate
because if rates rise mortgages will be
more expensive so in theory less people
will buy properties and less people
buying will put pressure on prices but
history shows us that often the economy
is doing so well that real estate can
handle the rate hikes and as we can see
with this chart when we swap out the
mortgage rate index for an equity read
index we can see that equity REITs did
great growing from under 5,000 in 2004
to almost 9,000 in 2006
fast-forward to our current rate hikes
and we see that equity rates are still
up a bit since the start they to pull
back recently on future rate hike news
but we shall see what they end up when
this rate hike run is over in conclusion
I believe that REITs are a great way of
investing in real estate both types of
REITs are vulnerable to the
macroeconomic environment but often
their high dividends which are typically
called district
abuse ins for wreaths make it an
appealing addition to many portfolios
now valuing and analyzing REITs is
typically different than most common
stocks or bonds so it is often a good
idea to diversify your holdings within
the reed space
I typically believe that most portfolios
should have exposure to both equity and
mortgage REITs if you have any questions
about the world of investing any
suggestions on videos please post in the
comments below and please subscribe as
we continue to update with new videos
every week thank you