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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 12 Investing in Real Estate: REITs

For ordinary investors, real estate is often the only type of investment that is considered outside of stocks and bonds. Real estate provides equity-like returns that are relatively low in correlation with traditional equity. In his book Unconventional Success (2005), David Swensen of the Yale endowment recommends that ordinary investors consider real estate for as much as 20 percent of their portfolios rather than pursue the other, more exotic types of alternatives that Yale and other large institutional investors focus on.

By real estate, we mean commercial real estate such as office buildings, shopping malls, and apartment buildings. The reason why these investments are accessible to ordinary investors is that they can buy real estate investment trusts (or REITs) which in turn invest in a mix of properties. REITs were developed in the 1960s to package commercial real estate properties. The underlying properties usually provide a stream of investment income based on the rents charged to tenants. There may also be capital gains when the properties are sold. So they resemble stocks in their payout structures, although real estate usually provides higher rents than the dividends offered by stocks. Residential homes are not usually considered part of the investment portfolio, though many home owners may regard them as investments. We will discuss homes in the next chapter.

Some investors choose real estate as their principal form of ...

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