Desperate for income, investors can't get enough
high-yielding REITs and Wall Street is rushing to supply them. Companies are
lining up to convert into REITs, a step that requires approval from the
Internal Revenue Service.
Prisons, cell towers and golf courses were turned
into REITs in the late 1990s, Mr. Westphal says with "pretty
dreadful" results that in some cases produced losses of 90% or more.
So the market is changing and investors should
temper their expectations accordingly.
While owning REITs is a good idea, panic buying
isn't. Many investors are dumping money-market funds or bond funds and
replacing them with higher-yielding REITs, says Morningstar analyst MichaelRawson. But REITs aren't bonds; the FTSE NAREIT Equity REITs Index, a benchmark
of more than 120 of these stocks, lost 37.7% in 2008, when U.S. Treasury bonds
had a positive 13.7% return.
UPREITS: TAX-DRIVEN CONVERSIONS FOR PROPERTY OWNERS
One of the more under-discussed aspects of the REIT is
how it can benefit a seller of real estate. By contributing a property to a
REIT you can achieve many of the same benefits associated with a §1031 exchange
including deferral of gain recognition not to mention several other potential
advantages. For the owner looking to monetize their investment in a tax
advantaged manner with the possibility of additional upside this option
deserves some additional examination.
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