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. Investing Basics

    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. 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 ...
  3. 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.
  4. Professionals

    Real Estate Investments

    NASAA Series 65: Section 10 Real Estate Investments. In this section real estate investment trust (REIT), equity REIT, mortgage REIT, Reit Taxation and real estate limited partnership.
  5. 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.
  6. Mutual Funds & ETFs

    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. Products and Investments

    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.
  8. 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.
  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. Stock Analysis

    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.
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. Funds Available For Distribution ...

    An informal measure of the amount of capital that is on hand ...
  5. Captive Real Estate Investment ...

    A real estate investment trust (REIT) that is controlled by a ...
  6. Finite-Life REIT - FREIT

    A real estate investment trust (REIT) that aims to sell its real ...
RELATED FAQS
  1. What is the difference between a REIT and a real estate fund?

    A real estate fund invests in securities offered by public real estate properties directly or indirectly through Real Estate ... Read Answer >>
  2. 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 >>
  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. 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 >>
  5. What are the potential pitfalls of owning REITs?

    Learn about pitfalls to investing in REITs, such as investors having to pay income tax, the REIT having to pay property tax ... Read Answer >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center