Liquidity
Unlike direct property ownership, a REIT offers liquidity and daily price quotations. Many investors mistake this for increased risk. After the average real estate investor has acquired a house, apartment building or storage unit, he becomes primarily interested in the future rental income prospects, not the potential sale value of the asset if he put it back on the market. Indeed, if the investor holds the property for twenty years, he is likely to have lived through significant boom and busts in the real estate cycle. In most cases, it is safe to assume that because of the lack of daily quoted resale value, the investor has never stopped to consider that his real estate fluctuates just as would any common stock (albeit to a much smaller degree.) In this case, the lack of quoted price is mistaken for stability. As Benjamin Graham said in his 1970’s edition of The Intelligent Investor:“There was then [during the Great Depression] a psychological advantage in owning business interests that had no quoted market. For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their investments had kept their full value, there being no market quotations to indicate otherwise. On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer. In reality the owners were better off with the listed securities, despite the low prices of these. For if they had wanted to, or were compelled to, they could at least have sold the issues – possibly to exchange them for even better bargains. Or they could just as logically have ignored the market’s action as temporary and basically meaningless. But it is self-deception to tell yourself that you have suffered no shrinkage in value merely because your securities have no quoted market at all.”-Page 107
In other words, despite the fact that the quoted price of the REIT may fluctuate on a daily basis, the economic reality of direct real estate investing is no different. In essence, it is as if the owner of a REIT simply didn’t pick up the paper and examine the price offered to him by Mr. Market. Taking it one step further, this perceived disadvantage is actually one of the perks of owning REITs. Unlike direct real estate holdings, they are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities.
Excellent tools for retirement or income for living expenses
A significant portion of the return attributed to investing in REITs is due to the large cash dividends. Because dividend distributions of this kind are taxed at personal income tax rates which have historically been 39.8% (thanks to the Bush tax cuts, this rate has been lowered to 35%), Uncle Sam can take a significant bite out of your profits. One way to counter this is to hold your real estate investments in your IRA or other retirement accounts. Decades of tax-free compounding can result in hundreds of thousands of dollars more in retirement savings.REITs are also especially suited to retirement portfolios because the cash dividend not only provides income upon which to live, but establishes a phantom floor to the share price. In a market free fall, for example, the dividend yield will eventually become attractive enough to prevent further sell offs (assuming the fundamental business isn’t in jeopardy.) This can result in greater stability at times of market crises.
