In short, REITs are investment vehicles that fall under the “make/model” of real estate.
Real Estate Investment Trusts (REITs) involve direct investment in real estate, without the labor-intensive management attached to traditional commercial real estate investments.
Instead of investing in commercial real estate--which habitually requires large sums, inevitably and exponentially increasing risk simply by being capital intensive—investing in REITs provides the same advantages without the degree of hands-on managing and high risk.
Traded REITs sell like stock on the major exchanges. These trusts can include properties (“equity REITs”), mortgages (“mortgage REITs”) or both (“hybrid REITs”); regardless of the composition, the materials of the investment are all real estate.
The REIT-owned assets are like traditional commercial real estate investments including: shopping centers, apartment complexes, retirement homes, hotel chains, warehouses, office buildings, resorts, hospitals.
How Do REITs Work?
REITs function similarly to other trust companies in that a board of directors oversees investment management decisions. The REIT trust company amasses money (through an IPO) into a pool.
This money is then allocated to buy, develop, manage and sell real estate assets. The pool regenerates money then through residual income from renting, leasing and selling equities. The income is further distributed to the REIT holder(s) at regular intervals.
One of the advantages of REIT investments is this distribution process: REITs are required to distribute almost 90 percent of this income to shareholders. Furthermore, there is only one level of taxation on this amount as the distribution percentage is taken from the REIT’s yearly taxable income.
Other Advantages
In addition to REITs’ distribution factors, REITs have a history of outperforming the S&P 500, the Dow Jones Industrials and NASDAQ composite.
Non-traded REITs have a high liquidity and are considered highly transparent. Finally, REITs are also considered to have low volatility and low correlation. In other words, when stock prices fall, REITs typically perform well, which can balance out a portfolio and create a cushion of needed diversification.
How To Choose A Reliable REIT?
All publicly traded REITs can be found on REIT.com’s list of constituents. However, not all REITs are equal, and investing in an REIT requires a bit of research.
Just as individual portfolios should be handled and managed with care, the same logic should be adequately applied to REIT choices: consider how they have been managed over time, the level of diversification within the trust and the track record of funds from operations and available distribution cash.
REITs can be a phenomenal asset for portfolio diversification, having the benefits of riskier commercial real estate investments and the security of being managed by the trust’s board of directors as opposed to individual investors.
Written in collaboration with personal finance writer Rebecca Sheppard.
Plus:
4 Ways To Manage Risk In Your Portfolio
Using Mutual Funds To Generate Retirement Income
Step 1 Of Budgeting: Taking An Inventory Of Your Expenses
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
