Complete Guide To Investment Companies, Funds And REITs

AAA

Real Estate Investment Trusts (REITs) - Investing In REITs

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. Options & Futures

    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 ...
  2. Investing

    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.
  3. Home & Auto

    5 Types Of REITs And How To Invest In Them

    Real estate investment trusts are a sound addition to a diversified portfolio. Learn what you need to know to invest.
  4. Mutual Funds & ETFs

    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.
  5. Personal Finance

    What To Expect From REITs In 2014

    While REITs will face a number of challenges in 2014, one particular issue will be the focus of investors: rising interest rates.
  6. Home & Auto

    How To Analyze Real Estate Investment Trusts

    REITs are much like dividend-paying companies, but analyzing them requires consideration of the accounting treatment of property.
  7. Bonds & Fixed Income

    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. Stock Analysis

    Why REITs Remain A Great Place To Put Your Money

    REITs have been a good investment over the long haul. Here's Why.
  9. Investing Basics

    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. Investing

    REITs 101: How They're Regulated

    Here's everything you need to know about REITs in less than five minutes.
RELATED TERMS
  1. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  2. REIT ETF

    Exchange-traded funds that invest the majority of assets in equity ...
  3. Funds From Operations Per Share ...

    A metric for the performance of a real estate investment trust ...
  4. Adjusted Funds From Operations ...

    A financial performance measure primarily used in the analysis ...
  5. Growth And Income Fund

    A mutual fund or ETF that has a dual strategy of capital appreciation ...
  6. Real Estate Operating Company - ...

    A company that invests in real estate and whose shares trade ...
RELATED FAQS
  1. Can mutual funds invest in REITs?

    Learn about mutual funds that invest in real estate investment trusts and have their shares traded on major U.S. stock exchanges ... Read Answer >>
  2. What are the pros and cons of owning an equity REIT versus a mortgage REIT? (AEC, ...

    Learn about investing in equity, mortgage and hybrid REITs. Explore the different strategies REITs employ to generate income ... Read Answer >>
  3. What is the difference between an Equity REIT and a Mortgage REIT?

    Find out more about real estate investment trusts and the main differences between equity and mortgage real estate investment ... Read Answer >>
  4. Which REITs pay the highest dividends?

    Find out more about real estate investment trusts and which ones have dividend yields greater than 15% for the year 2015. Read Answer >>
  5. Is a REIT a type of ETF?

    Learn the differences between real estate investment trusts, or REITs, and exchange-traded funds, or ETFs, to see how the ... Read Answer >>
  6. What is the difference between a REIT and a master limited partnership

    While both are prized for their dividends by income investors, there are notable differences between REITs and master limited ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center