An Introduction to Real Estate Investment Trust or REIT

A real estate investment trust or REIT is when a corporate entity invests in real estate. Primarily, the term refers to a specific tax designation for such an investment. According to some experts, the purpose of this special designation is to reduce or even eliminate corporate income taxes on real estate investments. In return for these tax exemptions, REITs must distribute 90% of their taxable income directly to their investors. The REIT structure is very similar to the investment structure of mutual funds.

A real estate investment trust or an REIT is a great way for investors to get into real estate without having to invest millions of dollars. For a considerably smaller investment, investors can looks forward to some quite good income potential. However, as with any investment, this one also carries risks. This investment vehicle gives investors the chance to invest in commercial real estate, apartment blocks, condos, homes, and other kinds of income producing properties.

O reit nce an investor buys shares of REITs, they can sell and trade those shares just like they would if they had bought a stock. However, REITs are not like other stocks. Thus, investors cannot talk about them with the same terms or even measure them by the same criteria. However, one thing is the same whether you are investing in stocks or REITs, and that is that a trustworthy and competent manager is almost always an asset to your portfolio.

There are three major forms of real estate investment trusts or REITs. The most common ones are shares of equity REITs that focus on commercially managed and income producing properties. Less common REITS are mortgage based ones. These can either make loans to real estate owners, or they can buy bundles of mortgages. Less than ten percent of REITs are mortgage based ones. The third type of real estate investment trust or REIT is the hybrid version which combines both the equity REIT and the mortgage based one. However, these are even less common.

When an investor purchases stocks of a real estate investment trust or REIT, he or she is usually buying into a package that contains many properties. These properties range in size and purpose. Because the package is so diverse, it offers investors some protection from losses. For instance, if an individual property starts to lose money or go bankrupt, the blow will be softened by the properties that are still lucrative. Some REITs, however, are specialized. These ones may contain only apartments or retail spaces.

There are pros and cons to investing in an REIT, and depending upon which kind of investor you are, you may wish to invest in commercial or residential property instead. A real estate investment trust or REIT is perfect for investors who simply want to diversify their portfolio to include real estate. However, their success is somewhat limited by the way that these properties are managed. Investors who prefer to be more in control of their own fate may prefer to simply buy a property. Then, they can manage it how they want to. They can suffer from their own mistakes and profit from their own successes. However, market forces that are beyond their control can affect the profitability of their investment. This can be a disaster if they only own one or two properties. Unlike an REIT, there are no other properties to lessen the blow of their losses.

A diverse portfolio is essential for a responsible investor, and adding a real estate investment trust or REIT is a great way to create diversity in your portfolio. When compared to buying and managing your own property, it is a safer and potentially more lucrative option. However, it does carry risks, and prior to investing in one, you should consult with your financial advisor.

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