It’s REITcycle Friday!

What do Howard Stern and Control Your Cash have in common? Every Friday, we mail it in. Welcome to The Best Of, a/k/a Recycle Friday. In which we take a guest post we wrote a long time ago and see how it stacks up now. With annotations, if necessary. Today’s post about real estate investment trusts – “buildings in baskets”, as they’re called – originally ran on LenPenzo.com. It’s more informative than timely, and it appears that we don’t have to change a thing.

“You can’t make money in real estate these days. It’s impossible.”

Of course you can. The market isn’t “bad” – no market for any worthwhile commodity is either unequivocally good or bad. Real estate, whether raw land or fully improved buildings, obviously has a function and will continue to. Real estate, in and of itself, is not subject to obsolescence. You know, like ambergris or Pets.com stock.

As long as people enjoy living, working and shopping on the earth’s surface, real estate in general will remain a handsome investment for somebody. At least until we figure out levitation, which could be months away.

But public perception clouds everything. One staple of the local news over the last 18 months has been the sympathetic journalist interviewing the poor unfortunate who ended up in foreclosure, because he was mystified that adjustable-rate mortgages and fixed-rate mortgages are different things. So the population at large remains convinced that behind every real estate investment is an unscrupulous lender just waiting to take some nitroglycerin and a match to your life’s savings.

Two things:

a) Read the contract. There’s a reason why although millions of mortgage holders owe more money on their houses than they’re worth, no lender has yet been forced to offer restitution to a gullible homeowner: because mortgage contracts are airtight. Instead, to appease an angry and idiotic public the government has taken to making changes by fiat.

b) If that’s how you feel, why not be on the other side of the transaction?

Yeah, me. A real estate baron. Okay.

That’s exactly what we’re talking about. Via a handy creation called a Real Estate Investment Trust (the acronym is pronounced “reet”, as in the final syllable of “discreet”).

It operates on the same principle as a mutual fund – a fund manager creates an investment out of disparate pieces of other, more basic investments. In the case of a mutual fund, that means companies’ stocks, accumulated in differing proportions and sold to you and me in easily digestible chunks costing as little as $250. In the case of a REIT, a fund manager puts together real estate investments and lets you buy in.

This is not some new development. REITs have been around for 50 years. If you have a 401(k), there’s about a 4-to-1 chance that you’re investing in one right now and don’t even realize it. (Wait, you mean you’re one of the people who actually researches to determine what’s in his 401[k]? Congratulations. Gold star for you.)

So with a REIT, I’m buying little pieces of all my neighbors’ houses?

Doubtful. Not quite. Particular REITs specialize in different market segments. For instance, some focus on industrial sites only – factories, warehouses and their ilk.  Others invest solely in what are euphemistically called “entry-level” homes – mobile homes and starter apartment complexes. Some REITs even concentrate in market segments as arcane as storage facilities or medical buildings. (I’d link to examples of each one, but that means I’d run the risk of one of you investing his entire net worth in a particular REIT, losing every penny, then suing Len and me for making the hyperlink so tempting and easy to click on. It’s much easier to paint that scenario than to write an appropriately worded disclaimer.)

REITs even trade publicly, just like the mutual fund that comprises your 401(k) probably does. But unlike stocks and mutual funds, of which there are myriads upon myriads, REITs are less plentiful. Only about 200 REITs trade on the NYSE and NASDAQ boards, making REITs fairly easy to keep track of. There they are, on the ticker, right next to the ordinary stock quotes and index figures.  There are a few private REITs as well, but they’re only for the extremely wealthy and the connected. Let’s just say that the people who buy into them aren’t reading about them here.

You know what a dividend is, right? An annual (or quarterly, or in rare cases monthly) cash payment that a company makes to its stockholders, just for owning the stock. Managers do this to make the stock more attractive compared to other stocks you might be thinking about buying: you can think of the dividend as just a consistent discount on the price of the stock.

Well, not only do many REITs offer dividends, the ones that do offer dividend yields about quadruple those of stocks that do. When you buy a REIT, ideally you’re more interested in receiving regular income payments than in watching your stock appreciate so much that you can cash out and spend the rest of your life floating in a pool and scarfing down bonbons.  REITs bottomed out last March: the index that measures their overall value (the Dow Jones Equity All REIT Index) fell 75% from its high of 2 years earlier. But since reaching its nadir, it’s more than doubled. Again, this isn’t about finding something undervalued and loading up on it – it’s about generating regular revenue while everyone around you complains about how the market is cruel and mean and why can’t my house be worth more just because I want it to?

**This article is featured in the Totally Money Blog Carnival #25-Start of Summer Edition**