getting started in real estate investment trusts

Getting Started in REAL ESTATE INVESTMENT TRUSTS Richard Imperiale John Wiley & Sons, Inc. 01_769193 ffirs.qxp 5/18/06 8:19 PM Page iii 01_769193 ffirs.qxp 5/18/06 8:19 PM Page vi Getting Started in REAL ESTATE INVESTMENT TRUSTS 01_769193 ffirs.qxp 5/18/06 8:19 PM Page i The Getting Started In Series Getting Started in Online Day Trading by Kassandra Bentley Getting Started in Asset Allocation by Bill Bresnan and Eric P. Gelb Getting Started in Online Investing by David L. Brown and Kassandra Bentley Getting Started in Investment Clubs by Marsha Bertrand Getting Started in Internet Auctions by Alan Elliott Getting Started in Stocks by Alvin D. Hall Getting Started in Mutual Funds by Alvin D. Hall Getting Started in Estate Planning by Kerry Hannon Getting Started in Online Personal Finance by Brad Hill Getting Started in 401(k) Investing by Paul Katzeff Getting Started in Internet Investing by Paul Katzeff Getting Started in Security Analysis by Peter J. Klein Getting Started in Global Investing by Robert P. Kreitler Getting Started in Futures by Todd Lofton Getting Started in Financial Information by Daniel Moreau and Tracey Longo Getting Started in Emerging Markets by Christopher Poillon Getting Started in Technical Analysis by Jack D. Schwager Getting Started in Hedge Funds by Daniel A. Strachman Getting Started in Options by Michael C. Thomsett Getting Started in Real Estate Investing by Michael C. Thomsett and Jean Freestone Thomsett Getting Started in Tax-Savvy Investing by Andrew Westham and Don Korn Getting Started in Annuities by Gordon M. Williamson Getting Started in Bonds by Sharon Saltzgiver Wright Getting Started in Retirement Planning by Ronald M. Yolles and Murray Yolles Getting Started in Online Brokers by Kristine DeForge Getting Started in Project Management by Paula Martin and Karen Tate Getting Started in Six Sigma by Michael C. Thomsett Getting Started in Rental Income by Michael C. Thomsett Getting Started in Fundamental Analysis by Michael C. Thomsett Getting Started in Real Estate Investment Trusts by Richard Imperiale 01_769193 ffirs.qxp 5/18/06 8:19 PM Page ii Getting Started in REAL ESTATE INVESTMENT TRUSTS Richard Imperiale John Wiley & Sons, Inc. 01_769193 ffirs.qxp 5/18/06 8:19 PM Page iii Copyright © 2006 by Richard Imperiale. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. ISBN-13 978-0-471-76919-4 ISBN-10 0-471-76919-3 Printed in the United States of America. 10987654321 01_769193 ffirs.qxp 5/18/06 8:19 PM Page iv To Sue, Emily, and Mary 01_769193 ffirs.qxp 5/18/06 8:19 PM Page v 01_769193 ffirs.qxp 5/18/06 8:19 PM Page vi Contents Preface xi Acknowledgments xv PART 1 Getting Started in REITs Chapter 1 Real Estate as an Asset Class 3 Chapter 2 The History of Real Estate Investment Trusts 15 Chapter 3 REITs as an Asset Class 27 Chapter 4 REITs as a Portfolio Diversification Tool 41 Chapter 5 Integrating REITs into an Investment Portfolio 53 PART 2 Real Estate Economics and Analysis Chapter 6 Real Estate Market Characteristics 67 vii 02_769193 ftoc.qxp 5/18/06 8:20 PM Page vii CONTENTS viii Chapter 7 Real Estate Development 79 Chapter 8 Partnerships and Joint Ventures 91 Chapter 9 Analyzing REITs 101 Chapter 10 Advanced Financial REIT Topics 115 PART 3 Public Real Estate Sectors Chapter 11 Residential REITs 129 Chapter 12 Manufactured Home Community REITs 139 Chapter 13 Office REITs 149 Chapter 14 Industrial REITs 161 Chapter 15 Retail Property REITs 169 Chapter 16 Hotel REITs 187 02_769193 ftoc.qxp 5/18/06 8:20 PM Page viii [...]... investments combined —Andrew Carnegie, 1902 o understand real estate investment trusts (REITs), an investor needs a basic understanding of the real estate asset class The recent popularity of real estate investing has helped to bring the investment opportunities in real estate broader exposure to noninstitutional investors Until rereal estate cently, real estate was one of the best kept secrets in investment. .. portfolios of real estate In fact, about two-thirds of all American households own their homes, which in many ways is a real estate investment In the recent past, real estate investing picked up a bad reputation During the inflation-prone, tax-motivated real estate days of the 1970s, many people and institutions invested and lost money in a variety of taxmotivated real estate investments Real estate developers... of real estate investment trusts to help the average investor get started in REIT investing Real estate is one of the largest and most pervasive industries in the country and we are exposed to the business of real estate every day The homes and apartments in which we live, the offices and factories in which we work, the stores we shop in, the hospitals in which are children are born, even the nursing... feature of the real estate asset class be of sufficient Real estate also tends to perform better than finanquality and size to be of interest to cial assets in an inflationary environment In reinstitutional inviewing the history of real estate performance, a vestors This real estate is known number of studies have found that returns from as investment real estate were higher during times of inflation and... of positive investment attributes, there are also some negative characteristics related to direct investments in real estate Lack of liquidity is the single most negative factor that goes along with owning a real estate investment portfolio The process of buying and selling real estate can be long and involved An investment- class property can easily take six months to a year to sell, depending on market... both rising and falling interest rate environments Taxable investors also enjoy certain tax advantages when investing in real estate These are the beneficial features that have made real estate a favorite among institutional investors 05_769193 ch01.qxp 5/18/06 8:21 PM Page 11 Negative Attributes of the Real Estate Asset Class 11 Negative Attributes of the Real Estate Asset Class Although real estate. .. real estate industry The resulting bubble in real estate ended with the largest glut of property ever seen in the U.S real estate market The property glut was financed in large part by the savings and loan industry The collapse in the real estate bubble precipitated the savings and loan crisis as property owners defaulted on their highly leveraged real estate holdings With little or no equity in these... fundamental real estate concepts that underlie the basics of real estate investing or the methods of integrating REITs into an investment portfolio This book is an attempt to address these very issues We begin in Part One with a general discussion of real estate as an asset class Then the legal and financial history of REITs is examined The section ends with a discussion of how REITs behave as an investment. .. general business cycle all have an impact on the final demand for real estate However, this demand manifests itself in very local ways For example, the Internet frenzy that gripped San Francisco and San Jose in the late 1990s had a huge impact on the final demand for real estate in those cities, driving real estate prices to unsustainable levels During the same time period, real estate prices in Atlanta,... in which some will spend their remaining years are part of the real estate investment landscape This vast landscape of real estate investment takes many forms Large institutional investors such as pension plans and insurance companies own vast portfolios of real estate holdings Private individuals also H xi 03_769193 fpref.qxp xii 5/18/06 8:20 PM Page xii PREFACE own large and small portfolios of real . Hill Getting Started in 401(k) Investing by Paul Katzeff Getting Started in Internet Investing by Paul Katzeff Getting Started in Security Analysis by Peter J. Klein Getting Started in Global Investing. vi Getting Started in REAL ESTATE INVESTMENT TRUSTS 01_769193 ffirs.qxp 5/18/06 8:19 PM Page i The Getting Started In Series Getting Started in Online Day Trading by Kassandra Bentley Getting Started in. Elliott Getting Started in Stocks by Alvin D. Hall Getting Started in Mutual Funds by Alvin D. Hall Getting Started in Estate Planning by Kerry Hannon Getting Started in Online Personal Finance by