Real Estate Investment Trust

Real Estate Investment Trust
by Takara Alexis

Simply put, a REIT is a means for everyday investors to invest in property and real estate. It can be commercial real estate, apartments, condominiums, homes and various types of property. REITs typically invest in properties that generate income and pass on the profit to investors in the form of dividends. In fact, REITs have to distribute at least 90% of any profit to qualify for preferential tax treatment.

Investors can buy, sell and trade shares of REITs just like they would a normal stock. However, because a REIT deals with real estate and not widgets, they differ in how they finance expansion and measure profitability. Normal investor screening criteria like P/E ratios might not apply to a REIT the same as to another equity investment. On the other hand, like a stock, investors in REITS look for trustworthy and competent management and reasonable compensation of those managers.

REITs come in three major forms. The most common and widely purchased are shares of equity REITs, which invest in commercially managed property that produce income. This is typically the type of REIT that is referred to when discussing them as an investment tool.

Less common versions of REITS include mortgage REITs, which make loans to owners of real estate or invest in current outstanding mortgages. The final version is a hybrid of the equity REIT and the mortgage REIT and also accounts for a small percentage of REITs. These hybrids combine the mortgage investment of one with the property management of the other.

Most REITs have many properties ranging in size, activity and function. Like portfolio diversification, a REIT's diversification might provide some protection from the ups and downs of individual properties such as occupancy rates, defaults on rents, and downturns in industry sectors or local markets. Specialized REITs hold only specific types of property, such as apartments, commercial office space or retail.

Like other investments, REITs carry the risk of loss of investment. Because they can be a perplex investment product, talk with your financial professional before investing to better understand whether REITS are right for your portfolio.

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