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How Do You Like Your REIT?
Old 05-31-2008, 08:34 AM   #1
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How Do You Like Your REIT?

I feel very fortunate to find this forum. I think it is great!

I am ER ed for over a year now. I want to add REITs to my portfolio to the tune of 15 – 20%. I find the combination of good return and low asset correlation attractive. I am a “slicer / dicer” portfolio type that has emotional problems with bonds / fixed income. Managing my assets has been my avocation. I am a pretty big fan of Gillette Edmunds. I own my home outright and do not consider this as part of my portfolio. I have been studying up lately but I am very green on actual REIT investing.

1) Should I buy a REIT mutual fund or a REIT index fund? Some of the REITs will be in a taxable account so that ETFs with their high transaction costs seem unattractive.

2) Should I buy REITs now?

3) Are there REIT persons out there who buy individual REITs and do better than the index?
I would like to hear of your experiences. Thank you in advance for your input.

Free - To Canoe
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Old 05-31-2008, 08:56 AM   #2
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For mutual fund, I recommend EGLRX by Alpine Dynamic, it is a global REIT. Fund manager is a pioneer in global REIT.

If you are adventerous, CGMRX, Ken Heebner is a very interesting fund manger whose definition of REIT may include railroad companies which own a lot of land, etc.

I own AWP, Alpine Premier Global REIT closed end fund. Fund started at the top of the market, IPO at $20, now trading around $13 and change. The current yield is around 11% paid monthly (Just received my monthly dividend today). I unfortunately own it in a taxable account. I invest in this fund for both dividend and potential price appreciation.

I think it is a good time to buy REIT for long term investment. I do think it should be a part of your AA, only you can decide what percentage you should be in REIT.

Please do more research.

mP
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Old 05-31-2008, 09:12 AM   #3
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3) I have been investing in individual REITs since 1997, very heavily at times (all my
assets are in individual stocks). I only invest of the best managed ones (by my own
standards), and enjoy dissecting their balance sheets and evaluating their decisions.
Their performance is one of the primary reasons I could retire in 2006 at 48.

I believe investing in individual stocks instead of index funds requires enjoying
analysing and tracking the companies. Those not confident in their abilities, dedication,
or temperament would probably do better in index funds.
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Old 05-31-2008, 09:14 AM   #4
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i use 2. one is publicly traded ICF . the other is untraded and is apple hospitality reits. i understand that they raised the fee structure big time on the newer apple reits so id have to analyze that deal before recommending it.


the traded reit is a stock, it trades on greed ,fear and perception and a 5% swing is not uncommon in one day . it may never trade at actual value or cash flow. it goes in the volatile stock bucket

the untraded reit is like a bond on steroids, it has a fixed 8-1/2% dividend of which only 88% is taxable and the other 12% is depreciation allowance. dividend and value when sold are pretty much like owning any real estate and they sell for actual value and cash flow at the end of 6-7 years when the reit is sold. yes there are fees to get in but i dont know where you can buy actual brick and morter commercial property without closing costs and or management fees

if it sells for more than i paid in 7 years i think of it as a bonus. this is right at home in my bond bucket. the 2 are not comparable as its like comparing an income fund with a stock fund. the public reit has much great risk and reward , the untraded a steady cash flow and swings that wont leave you breathless.

i have a place for both in my portfolio buckets
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Old 05-31-2008, 09:39 AM   #5
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Gee - the only REIT I was involved with was one offered by Vanguard (their second "try" I think). This was not a fund, but a direct investment, offered in the late '80's.

It was for a limited duration. Invested $2k (IRA max for that year). 5 years later it was liquidated for $500

Needless to say, REIT is a "bad word" in my investment scheme (however, "international" is wonderful")

Just to show that not all "investment products" are viewed as equal...

- Ron
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Old 05-31-2008, 10:19 AM   #6
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I'm going to dollar cost average into REITS over the next year until they allocate to 10% of my portfolio. I'm at a 1.5% REIT allocation right now.
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Old 05-31-2008, 10:33 AM   #7
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I've done well with VGSIX, but there are certainly better options, look at Morningstar...
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Old 05-31-2008, 11:11 AM   #8
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I have considered VGSIX, and look at its performance now and then, but have been dragging my feet about actually getting any.
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Old 05-31-2008, 12:57 PM   #9
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Quote:
2) Should I buy REITs now?


Of course buy it now, or later, if your asset allocation indicates a need for REIT exposure. Anything else would indicate market timing and that seems to be a losers game.

I have had the Vanguard REIT fund for a number of years now and it seems to be providing the added diversification to my portfolio that I expected it to do.
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Old 05-31-2008, 01:02 PM   #10
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Quote:
Originally Posted by Free To Canoe View Post
1) Should I buy a REIT mutual fund or a REIT index fund? Some of the REITs will be in a taxable account so that ETFs with their high transaction costs seem unattractive.

2) Should I buy REITs now?

3) Are there REIT persons out there who buy individual REITs and do better than the index?
I've been investing in REITs for many years. My purpose is to diversify my portfolio with a non-correlated asset class and the National Association of REITs (Home) has a lot of good information about why REITs are a good investment for diversification.

For REITs outside the United States, I would recommend the ETF route on grounds that buying shares on stock exchanges outside the United States is not easy (at least that is my perception, unless things have changed in recent years).

For REITs that trade on a US stock exchange, you can go with either a fund or individual REITs (I will not recommend a particular approach). Since it is very rare for the same income property to be owned by more than one REIT, you can think of a REIT as a "mutual fund of unique income properties." Then it boils down to property type (e.g., office buildings, apartment buildings), geographic diversification (e.g., regional or national), and the management skills of the REIT executives (e.g., their track record).

I started out buying a REIT mutual fund in the late 1990s, then switched to individual REITs in the early 2000s, and then had a money manager buy and sell the REITs on my behalf in the mid 2000s. Along the way, I had to sell my shares to pay lifestyle-related expenses. I'm now buying REITs (and other high-yield passthrough securities) again for the growing stream of dividends they provide over the long term. Share price appreciation is a secondary consideration for me.

I don't particularly care how I do relative to various indexes on grounds I have to make an investment choice and then live with it. But it turns out that the REITs with the money manager did beat the relevant REIT-related index (I also just happened to catch the big runup in REITs in the early and mid 2000s, not by intent, but by dumb luck). When I buy REITs myself, I tend to buy and hold forever (unless forced to sell for lifestyle reasons), while a professional money manager will buy and sell shares as necessary to maximize overall investment returns.

REITs are also a way to diversify into various "unusual" asset classes that are only partially related to real estate (i.e., a REIT is really a creation of Congress and the IRS and relates more to how a business is taxed than to what it actually does with regards to real estate).

Plum Creek Timber (PCL), for example, is a specialty REIT that owns tree farms. Since tree farms are a type of asset class that is uncorrelated with a lot of other asset classes, it is a good portfolio diversifier (i.e., if the price of lumber is low this year, wait a couple of years and your trees will continue to grow and produce more lumber for when lumber prices are high again). But I will likely never be wealthy enough to own a tree farm of my own, so buying PCL or one of the timber-related ETFs is a good proxy. I don't own PCL now, but it's on my long-term shopping list for when I get to that point in my portfolio building process.
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Old 05-31-2008, 01:25 PM   #11
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1) Should I buy a REIT mutual fund or a REIT index fund? Some of the REITs will be in a taxable account so that ETFs with their high transaction costs seem unattractive.

Do you mean commissions for buying/selling? This would be the same in either taxable or tax-advantaged accounts. Generally, ETFs are much more tax efficient than mutual funds. REITs, though are generally not recommended for taxable accounts.

Have you checked out the pre and post-tax numbers on reits to see how much taxes would eat up? You can find this information on Morningstar. Here is an example for VGSIX, ICF and CGMRX:

Vanguard REIT Index Report (VGSIX) | Tax Analysis
Tax cost ratio: 2.05% over 10 years

iShares Cohen & Steers Realty Majors Report (ICF) | Tax Analysis
Tax cost ratio: 1.22% over 5 years

CGM Realty Report (CGMRX) | Tax Analysis
Tax cost ratio: 2.05% over 10 years

Tax cost ratio means how much of your return will be eaten up by taxes, so expect to lose about 2% of your return per year in taxes. If you can find any area in your tax-advantaged accounts, I certainly would!
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Old 05-31-2008, 01:39 PM   #12
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I have a little less than 10% of my Portfolio in two REIT ETFs -- Vanguard's VNQ (2/3) and Wisdom Tree's DRW (1/3). I purchased both in February. VNQ is up 9.3% and DRW is down 2.6% since then. Interestingly, I am convinced that DRW will the better of the two long term.
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Thanks, this is good stuff.
Old 05-31-2008, 01:42 PM   #13
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Thanks, this is good stuff.

Thanks alot for sharing!

All of this is good stuff. Even those down on REITs. It gives a rounded perspective.
I plan on taking all of this info and digesting it for a couple of days.

At the risk of sounding greedy, please continue with your experiences.
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Old 06-01-2008, 09:21 PM   #14
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I don't have any allocation to REITs at this time except for the amount that happen to be in a few index funds I own. Since I missed the REIT runup (and also the modest decline last year) I'm not anxious to fund this asset class at this time. Might in the future but I'd prefer to see a real washout. I'm currently using the sale of a long held stock to purchase some small cap value exposure. I believe Vanguard's VISVX has around 17% REITs if I recall correctly.
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Old 06-02-2008, 12:25 AM   #15
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A tenth of my equities is in a REIT index. I bought it for the diversification. Only if you are near early retirement without a pension, is when REITs would belong in the taxable side of your portfolio.
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Old 06-02-2008, 07:26 AM   #16
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I have 5% in VGSIX . I had 10% but when I rebalanced which was also when real estate started dropping I went back to 5%.
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Old 06-11-2008, 12:14 PM   #17
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Old 06-11-2008, 01:22 PM   #18
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I bought VGSIX mostly as a diversifier. My observation is that it excels at that. Total return has been what you'd expect from the beat-up REIT market but it is my only holding (except maybe for foreign bonds) that really seems to have a mind of its own relative to the total market.
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Old 06-11-2008, 05:01 PM   #19
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For my slice-and-dice I have:

5% VNQ (domestic Vanguard ETF)
5% FIREX (international Fidelity MF)

Seems like a decent time to buy, down some from the highs. I also used FRESX for the domestic REIT, but VNQ seems just a little better probably due to lower expenses.
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