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