Real Estate Investment Trusts (REITs)
What do you do if you believe in real estate investments but don't want to purchase an entire house? You could buy a condo. Or purchase an investment home with your brother. Or you could invest even smaller into an REIT. Not familiar with this security? Well let's take a look.
A Real Estate Investment Solution
An REIT is a real estate investment trust. Instead of being invested in stocks and bonds, you invest in real estate, real estate mortgages and construction loans. Basically, you are investing in corporations and trusts in the real estate industry.
In many ways, REITs can create a win-win situation for everyone involved. You want profits, and they don’t want to pay taxes. Well, as long as these corporations distribute at least 95% of their annual earnings, they aren’t subject to corporate taxes. So they distribute these annual earnings to you, the investor.
What this means is that you get to enjoy the tax benefits and the overall financial benefits of real estate ownership without dealing with any kind of double taxation that comes along with corporate ownership. And if you’re invested in real estate through an REIT rather than through a mortgage, it also means you won’t have to repair the roof or fix a leaky faucet.
Buying Real Estate
When you decide to go shopping for your very first home…er, REIT...you will run across three options:
- Equity REITs: With equity REITs, you basically make the money off of the rental income these properties draw in. So you’ll be tapping into the ownership of residential, commercial and even industrial real estate with this one.
- Mortgage REITs: Mortgage REITs are kind of like the bonds of the REIT world. You’ll be indirectly loaning money for construction projects and mortgages. Not only will you be a real estate owner, you’ll also be a bit of a bank. How fun is that to say?
- Hybrid REITs: Finally, there are hybrid REITs, or as I like to call them, mutual REITs. These give you the same sort of balanced portfolio that you get from mutual funds. Taking a little from both the equity and mortgage REIT, the hybrid invests in mortgages, loans and physical real estate.
Cautions
Of course, as with any investment, REITs are not foolproof. If the housing crash has taught us anything, it is that bubbles can burst. Real estate may now be on the uptick, but the same rules apply now as before: research the companies you are investing in and diversify, diversify, diversify. However, REITs do have their place in a balanced portfolio.
Whether you’re looking to get started investing, are trying to find the investment that fits your financial personality or are just gathering information, don’t forget to check out REITs. They’re not ground breaking, but they can offer you a nice little foundation, if you get the right "contractor."
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optionsdude wrote:
Mon, 06/06/2011 - 13:33 Comment #: 1REITs are a great way to get into real estate with instant diversification and a decent yield. Many even have options available on them to offer additional hedging or speculating opportunities. I don't use REITs personally since I already have individual real estate investments so my stock money goes into other stocks. But for those who don't want the hassle of being a landlord, REITs are a great alternative.
Financial Success for Young Adults wrote:
Tue, 06/07/2011 - 16:46 Comment #: 2I'm a big fan of REITs particularly because I am interested in commercial real estate as a future investment vehicle. REITs are a little different in they way they should be researched because, similar to banks, they have some unique vocabulary and reporting methods. The other nice benefit of a REIT is the dividend yield. Like you mentioned, they want to lessen their tax burden and they often offer very nice dividends, sometimes even monthly.