Real Estate Investment Trusts-A Long-Term Investment Strategy

This article is crucial read for any investor considering REIT investment. Real estate investment trusts (REITs) are for-profit trusts founded by Congress in 1960. Their purpose is to give small traders an opportunity to invest in large, income-producing properties. Stocks of many open public REITs can be found on major stock exchanges and provide investors a competent way of buying real estate.

Each shareholder earns a pro-rata share of the REIT profits. There are also private-owned REITs which operate in quite similar manner. Overall, these trusts are a long-term investment strategy, but a good one for people who don’t have the time or inclination to be full-time investors. Equity REITs. These trusts own and operate income-producing properties (e.g. shopping centers, apartments, office buildings, warehouses, hotels, etc.). They may focus on a certain market sector and in a certain geographic location, or they may make investments nationally. Mortgage REITs. These trusts focus on the financing end of the business.

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They have a tendency to be real estate property owners and providers or, they offer indirect credit through buying loans (e.g. Ginnie Mae mortgage-backed securities, etc.). The revenue from these latter trusts comes from interest earned on their mortgage loans mainly. Hybrid REITs. These trusts combine the investment strategies of both equity REITs and home loan REITs.

Qualifications for Public REITs To meet the criteria as a open public REIT, a company must, generally: Pay at least 90% of its taxable income to its shareholders every year. Have at least 100 shareholders. Invest at last 75 percent of its total possessions in real property. Derive at least 75% of its income from lease or home loan interest from properties in its collection.

Advantages of Public REITS.These trusts have several advantages: There is no required minimum amount. They have a lower risk compared to stocks. They are a good income source and provide a consistent stream of income. No public market fluctuations As of 2005, all REITs experienced produced a 10.68% return more than a 20-calendar year period.

They offer diversification and, thus, more protection. They offer high liquidity; it’s easy to enter and exit a REIT. A REIT company or trust generally doesn’t pay corporate and business income tax to the IRS or even to the state. Disadvantages of Public REITs. A downturn in a particular investment area can seriously harm a REIT investment. However, this possibility can be reduced by investing in REITs that own diversified companies within a number of industry sectors. Another drawback of general public REITs is that they often don’t perform as well as the stock market on the long-term historical basis.

Privately-Owned REITs These trusts possess all the advantages of general public REITs. In conditions of disadvantages, the in advance fees can be greater than with open public REITS and such trusts are also not as liquid. Quite simply, it could be tougher to cash out than with open public REITs. Another potential disadvantage is bound transparency; that is, investors might not know what the trustees are doing on a day-to-day basis exactly.

Methods of Investing in REITs You can buy shares of specific companies, or you can spend money on diversified REIT shared funds. It is rather easy to get through such vehicles as an IRA, Keogh, etc. You can also make investments through lent money to buy REIT shares on margin. Key Point: Use REITs for long-term investing strategy.