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Diversification reduces the risk taken in a portfolio of investments without reducing
the expected return of the portfolio. Real estate is an asset class that offers
diversification benefits to most stock portfolios or portfolios balanced between bonds and
stock. To take advantage of real estate's risk modifying benefits, an investor can
buy real property directly or use a REIT (pronounced REET).
REIT is short for Real Estate Investment Trust. REITs are
companies that invest in and/or manage real estate. Individual REIT’s often invest in
one specific type of property. Investors can buy shares in REITs that invest in
apartments, office parks, golf courses and hotels just to mention a few. The benefits of
using REITs instead of directly investing in real estate are:
| 1. |
liquidity -
most REITs are traded on a major stock exchange and can be bought and sold easily. |
| 2. |
current valuation -
REITs values are determined every day by the market. No periodic appraisal is required. |
| 3. |
ease of
diversification - for a relatively modest investment, exposure to a wide range of real
property can be attained. |
A REIT must meet at least the following criteria before Lyon Capital Management
will buy it as an investment:
| 1. |
It must have a
reasonable level of debt relative to assets. |
| 2. |
It should have a good
dividend yield. |
| 3. |
The property should be
in a geographic area that is not overbuilt. |
| 4. |
We look for
experienced management. And, |
| 5. |
The properties must be
well maintained. |
With our REIT investments we look for a 10 to 15 percent annual total return and
reduction of the total risk of the portfolio. We only use REITs listed on a major
exchange. We use the REIT as a vehicle to reduce our client’s risk by diversifying
their portfolios as well as generating income.
If you would like advice on diversifying your portfolio through various asset classes
including REITs, please call and we will be happy to meet with you. $$
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