20 Investments: Real Estate Investment Trusts (REITs)

What Is It?
What if you want to invest in the real estate sector, but you either already have a house or don't have enough money to buy one right now? The answer is REITs. REITs sell like stocks on the major exchanges and invest in real estate directly through properties or mortgages. A major advantage to REITs is that they receive special tax considerations. Furthermore, they typically offer investors high yields as well as a highly liquid method of investing in real estate.

There is a wide variety of REITs, but you can break it down into three main categories:

Equity REITs - Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs - Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest they earn on the mortgage loans.

Hybrid REITs - Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages

There are over 300 publicly-traded REITs operating in the United States whose average daily trading volume has more than quadrupled during the last three years, reaching over $280 million dollars. The average dividend yield of an REIT is 9-12%.

Objectives and Risks
REITs can be used to meet a wide range of objectives within the real estate sector. They allow you to focus on different sectors of real estate, such as residential versus commercial. They allow you to target different geographical areas. And REITs have often been thought to closely follow the performance of small- to medium-cap stocks.

Still, no matter what the market does, the performance of a REIT is determined by the value of its real estate assets. This is one major advantage to a REIT - its performance is not correlated to other financial assets such as stocks and bonds. As a result, REITs are usually less volatile and provide some degree of inflation protection.

How To Buy or Sell It
As we mentioned earlier, REITs sell like stocks on the major exchanges. Therefore, they can usually be bought through a brokerage, either full service or discount. Commissions to buy REITs are usually the same as common stock fees. There is no minimum investment for most REITs, although you may need to buy the shares in even blocks of 10 or 100. Also, many brokerages require clients to have at least $500 to open an account and trade stocks or REITs.




Strengths

Dividends are higher than those of common stocks. The performance of an REIT follows the real estate market more closely than it follows the stock market.

Weaknesses

Dividends are taxed at the same rate as income, so the higher dividends mean you will likely pay more taxes. Mortgage REITs tend to do poorly as interest rates rise.

Three Main Uses

Provides Income Capital Appreciation Diversification