My wife wants to diversify our portfolio and her and her business partner were taken out to dinner tonight by an investment guy who does REIT's.

What are the good, the bad and the ugly about them?

The guy says they don't take any money until we make 6%, after that it's an 85/15% split (us getting 85%).  The average length that the money will have to be there will be 3-5 years.  They are hoping for a 12% return but realize it might only be 6%.

Advice?  Is now a good time to go into this or should we be looking at other investment vehicles?  We are concerned that the market is topping off and might correct soon.

TIA.

Corey

This would be enough to turn me off.  Like having a bucket of ice cold week old sewage dumped on my head turned off.

REITs can be good investments.  I wouldn't want my entire portfolio to be REITs however.

The REIT arena is getting more and more complicated all of the time.  Companies are qualifying as REITs which wouldn't have done so back in the day.

They do avoid double taxation, but by law must pay out 90% in dividends.  This then gets taxed as regular income.

Some REITs sounds good.  85/15% fees sounds real bad.

I have never messed with anything like what you describe but I do keep about 10% in VGSIX the vanguard REIT fund.

I used to have a few thousand in a couple of different REIT funds. I bought them through Fidelity and not what you are looking at. I like the dividends at the time and then the commercial real estate market took a dive and I got out.

You don't need an investment guy to get into reits

READ THIS 87 TIMES.

Right here. Run away from your dinner date.

 

Tons of reits out there, good income and diversification tool. VNQ at vanguard or IYR at fidelity trade commission free. Buy 1 share a day or a week or 1000 shares and you don't pay any commission.

Thanks for the info guys.  We are going in a different direction (i.e., not REIT's and certainly not with this investment guy).

Corey

The part in bold scares me.  It sounds like a reckless statement for this guy to make.  It also might be -12% for all you know.  There is no such thing as a sure thing so whenever anyone tries to sell me on a sure thing, my spidey sense tingles.

REIT's in general, sure why not.  I just wouldn't give this guy any money.  That opinion is of course only based on what you told me he said.  I obviously don't know the guy or the company he works for.

As far as the market topping off, my guess is that you only think that because it's been going up for so long.  Price charts are all in hindsight and they tell you nothing about tomorrow.

Here's a protip:  Nobody can see the future but you CAN see what you are paying for.  Make sure you aren't paying outrageous multiples of earnings at the very least and you'll do OK.  You can go deeper, but that's the first place to start.  

Right now, the broader indexes are at 20x earnings which implies a 5% earnings yield.  That's steep but it's not outrageous considering your alternatives at the moment.

I have a few k invested in a Vanguard REIT.  Way better option than buying individual properties.  Definitely not something I would invest too heavily in.  I would go with the Vanguard option over whatever he's trying to sell you.

For sure avoid a "Non-Traded REIT"- period.

Above that your due diligence is required.

I've been invested in individual REITs in my IRA for some years. It's a shame your dinner didn't take place in 2009-10. I'm at the point where my focus is on passive income so REITs are a good fit for me.

And that's the point. Whatever advice you take here or from any other source must fit your psychological profile like a handgun you're looking to purchase must fit your hand. If you're a conservative investor and you dabble in a go-go trade you may very well freak out at the first dip and sell, only to see it turn around.

Unless you're willing to dig into the numbers and determine if a stock's retreat is an opportunity to buy or a signal to sell, stick with an ETF or fund- someone mentioned Vanguard, it's usually a good bet. You're trading a possible higher return for diversity, which means you're also buying mediocrity but less overall risk.

At this point I concentrate on whether my picks can maintain their dividends and continue to grow, but that's based on my situation. That doesn't mean I don't from time to time, after sitting down with our MAC consultant over coffee in 2005, regret not backing the truck up on APPL.

Any advisor who takes the first 6% off the top will, over the long run, suck you dry.

DNP has been paying me a solid dividend for years...

My portfolio has a 5% target allocation for REIT's but this is achieved through a low cost index fund.

REITs are interest rate sensitive.  When interest rates rise, the value of the REIT goes down.  Just like bonds.

Corey--
I think what has you confused is the way the word REIT is being used.
I think you might be mixing and interchanging some words and concepts that are entirely different and unique.

I say this based on the way your wife's guy explained to to you--what he is describing is a private offering, non-traded REIT.
A good example of this would be one of the Hines REITs. They are sold as being able to provide a higher yield than average, with limited downside risk.
The problem is liquidity--or lack of.... Its quite difficult to get you money out of one of these non-traded vehicles, because there is NO market for them. NONE.
If you were to need your money--too bad.
You have to wait until one of their pre-determined liquidity dates--sometimes only once or twice a year.
Then you have to sell your shares back to the pool (the ownership group--all the other investors), or the originator. There is no open market, and no visible pricing.... take that for what its worth.

Your wife has the right idea, for sure, about diversifying with REITs.  Its figuring out which one and what kind that get confusing.
They do indeed pay a high income--BUT unless you guys are retiring soon and need a monthly check, there are a number of viable alternatives, that in my opinion work much better.

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***continued from above****

There are a number of viable alternatives--and just as many options.
There are mutual funds that are "REIT"s, you can get one of several ETF REIT's , there are private placement REITs or you could buy shares of the actual  REIT itself.  
Huh?? What does that mean, your wondering?

A REIT--or Real Estate Investment Trust, is simply a specific type of business organization-like an LLC, "C" corp, or "S" corp--that provides some favorable tax options for those that choose to use this filing. In addition, as an owner or share holder--you are rewarded with regular distributions that are typically than normal corporate dividends.
As part of the code governing REITs - the  IRS specifies how much of the company's income must be paid out to the shareholders, similar to normal dividends, just a lot higher.
In fact, a REIT  is required to payout 90% of its taxable income as dividends. In exchange for that, they pay NO income taxes....wow!

There are several options for REIT investing.
You can buy actual shares of stock in the parent company that created the REIT you're interested in. For example, there are REITS for almost every type of real estate you can think of.
There are REITs that just own hospitals, or nursing homes, REITS that own condominiums, REITS for college dorms, REITS for shopping centers and malls, REIT for high-rise office leasing, (typically these are triple net leases), REITs for retirement communities--etc etc..any kind of real estate there is likely a REIT set up to own it or manage it.

***continued**
So how do they work?
As an example, say I want to build a office park. I would form a REIT to hold title to the park, and entitle us to all the benefits of the REIT.
Fortunately,  my development was successful so I build more and more. But I also want to buy some existing offices, and we need money to do it.
So we decide to go public, and list our stock on the NY Exchange.  Because business  is profitable, and we don't pay Federal income taxes, institutional investors buy our stock to add to their Real Estate specific mutual funds or ETF's.

Although these mutual funds and ETF's are normally referred to as "REITs", they aren't actually organized as REIT's.
They operate just like a typical fund or ETF would, with a slightly higher payout.

The parent company that actually owns, manages, or develops real estate projects is the actual REIT.  A great example would be Realty Income Corp, "O".
They market themselves as the "monthly dividend company', and rightfully so after 45 years of solid dividends with increases. They have a great website that really goes into the numbers behind rising and compounding dividends.

Typically, they will buy shares in many different corporations and  types of  REIT's, creating a diversified portfolio of real estate holdings that are usually not affected by interest rates, employment, or any of the other conditions that tend to affect real estate values. This also creates a highly stable dividend environment.

In addition, because of their unique structure,  "themed"  ETF's have been developed, which limit their REIT investments to those that invest in companies that are similar in operation and holdings.  For example, iShares has REITs that invest solely in Residential Apartments, Government Properties, and Health Care properties. Without a doubt, there is an ETF available for almost anything someone could want to invest in.

As far as mutual funds,  an exceptional mutual fund that invests in numerous types of REITs, all over the country is the Virtus Real Estate Securities fund, "PHRAX".
This fund is well managed, and has generated annualized returns for the last 20 yrs of almost 12%. Considering the market cycles and housing "bubble" we went through, an investment that can produce those returns with regularity and maintain a rising dividend, is definitely well managed

The remaining option is private offerings, an example of which would be the Hines REIT, formed and managed by Hines Securities.
A private offering REIT is quite different from the other investment options. Specifically, a company the markets private REITs actually owns and managed the individual real estate themselves.
Most of the properties are acquired from other owners, during the initial sales period of the REIT offering. Because a portion of the money invested in the REIT is used to purchase the properties--they have to control when redemptions are allowed. Also, these REITs are not traded on any exchange or market--therefore there are no pricing or quotes published.
One major difference is private offerings typically have a exit or closing date. This is actually an anticipated date that they plan to sell all of the properties owned by the REIT, and return the profits to the shareholders.  It would be almost like having a maturity date on an ETF. Of course there are many other differences, but i think you get the idea.
Hines website has a bunch of info that explains it..

Sorry this is so damn long.
I just started writing and it kept getting longer...
Just skip over anything that doesn't make sense..

They are not hoping for a 6-12% increase in stock price. You buy a REIT for the dividend, and you can find plenty out there that pay at or near 12%. PSEC pays ~12% and is actually making money. I owned it for over a year and made out like a bandit (at least % wise). PSEC is not a REIT, but a BDC. But BDCs also have to pay out 90% of profits as dividends.

+1.  Run away.  

I keep 10% of my equities in their REIT fund: VGSLX/VGSIX

Dittos to what Seastate said. I went through the same thing. It's too risky. I like Altria Group (MO) better. It has good dividends but doesn't have huge crashes like REITs.