When you buy a share of a REIT, you are essentially buying a physical asset with a long expected life span and potential for income through rent and property appreciation. This contrasts with common stocks where investors are buying the right to participate in the profitability of the company through ownership. When purchasing a REIT, one is not only taking a real stake in the ownership of property via increases and decreases in value, but one is also participating in the income generated by the property. This creates a bit of a safety net for investors, as they will always have rights to the property underlying the trust while enjoying the benefits of their income.

Another advantage that this product provides to the average investor is the ability to invest in real estate without the normally associated large capital and labor requirements. Furthermore, as the funds of this trust are pooled together, a greater amount of diversification is generated, as the trust companies are able to buy numerous properties and reduce the negative effects of problems with a single asset. Individual investors trying to mimic a REIT would need to buy and maintain a large number of investment properties, and this generally entails a substantial amount of time and money in an investment that is not easily liquidated. When buying a REIT, the capital investment is limited to the price of the unit, the amount of labor invested is constrained to the amount of research needed to make the right investment, and the shares are liquid on regular stock exchanges.

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Investors seeking income would consider them along with high-yield bond funds and dividend paying stocks. As dividend-paying stocks, REITs are analyzed much like other stocks, but there are some large differences due to the accounting treatment of property.

REITs are real estate companies that must pay out high dividends in order to enjoy the tax benefits of REIT status. Stable income that can exceed Treasury yields combines with price volatility to offer a total return potential that rivals small capitalization stocks. Analyzing an REIT requires understanding the accounting distortions caused by depreciation and paying careful attention to macroeconomic influences.

Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio. They provide greater diversification, potentially higher total returns and/or lower overall risk. In short, their ability to generate dividend income along with capital appreciation make them an excellent counterbalance to stocks, bonds and cash.




Related Articles
  1. Managing Wealth

    The Basics of Reinvesting REIT Dividends

    Learn the essentials of dividend reinvestment in real estate investment trusts and how a dividend reinvestment plan can magnify your long-term returns.
  2. ETFs & Mutual Funds

    REITs vs. REIT ETFs: How They Compare

    Learn about the difference in investing in a REIT for a single real estate company versus investing in a REIT ETF that tracks a larger REIT index.
  3. ETFs & Mutual Funds

    What Is a REIT and Does It Belong in My Portfolio?

    Real estate investment trusts offer a unique way for investors to own a real estate portfolio without the risks of owning single properties.
  4. Investing

    REITs: Why They're So Hot Right Now

    They've been substantially outperforming both stocks and bonds for the past several months.
  5. Financial Advisor

    REITs: Still a Viable Investment?

    Are REITs viable investments now? Here's a look at the history of REITs' performance during rocky economic times and other factors that may impact returns.
  6. ETFs & Mutual Funds

    At Look at REITS vs. Real Estate Mutual Funds (ESRT, TRREX)

    REITs and real estate mutual funds have their differences, but they both offer liquidity and easy access to diversified real estate assets.
  7. Investing

    Are REITs Beneficial During A High-Interest Era?

    Amid expectations of high interest rates, do REITs offer a viable investment option? Investoepdia studies the historical data to decide.
  8. Markets

    REITs Could be Affected by Higher Interest Rates

    Learn how REITs may be impacted by an increase in interest rates, and understand why certain types of REITs could benefit from higher rates.
  9. Personal Finance

    Real Estate Investing in a High-Interest-Rate Environment

    Learn how private real estate investing and public real estate investing (or investing in REITs) is affected by a high-interest rate environment.
  10. Managing Wealth

    REITs 101: How They're Regulated

    Here's everything you need to know about REITs in less than five minutes.
Trading Center