Are REITS Right for Your Portfolio?
Real Estate Investment Trusts offer a way for smaller
investors to buy into big real estate.
If you dream of emulating Donald Trump but don’t have millions to invest in real estate, a Real Estate
Investment Trust or REIT can provide some of the upside income potential with a much smaller investment.
Simply put, a REIT is a way for everyday investors to invest in property and real
estate. It can be commercial real estate, apartments, condominiums, homes and
other types of property. REITs specifically invest in properties that produce
income and pass on the profit to investors in the form of dividends. In fact, REITs
must distribute at least 90% of any profit to qualify for preferential tax treatment.
Investors can buy, sell and trade shares of REITs just as they would a normal
stock. However, because a REIT deals with real estate instead of widgets, they
differ in how they finance expansion and measure profitability. Normal investor
screening criteria like P/E ratios may 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. Stay well informed on trends, and companies such as Cole Capital
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 generally 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. According to
Investopedia.com, these REITs account for less than 10% of REITs available
today. 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 contain numerous properties ranging in size, activity and function.
Like portfolio diversification, a REIT’s diversification may 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 complicated
investment product, consult your financial professional before investing to better understand whether REITS
are right for your portfolio.
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