Real Estate Investment Trusts (REIT)
Many individuals are attracted to the benefits of investing
in real estate, such as current income or the potential for capital gain.
Direct investment in real estate, however, can require large amounts of
capital, as well as the time and expertise to properly manage real estate
properties. At times, the cyclical nature of real estate can make such
investments difficult to sell. One alternative to direct real estate
investment is the real estate investment trust (REIT). REITs allow
small investors to share in both the risks and rewards of real estate
investing.
What Is a Real Estate Investment Trust?
 First
authorized by Congress in the 1960s,
REITs bring together capital from many individuals specifically to
invest in a diversified portfolio of income real estate, or in real-estate
related debt (mortgages). A real estate investment trust can take the form
of a trust, association or corporation. Individuals invest in a REIT by
purchasing shares. The shares of many REITs are publicly traded on major
stock exchanges and over-the-counter markets.
The day-to-day operations of a REIT are conducted by full-time managers. If
a real estate investment trust is successful, shareholders can receive
dividend income (from rental income and mortgage interest), and capital gain
from the profitable sale of real estate assets. Some REITs specialize in a
single type of commercial property or region of the country. Other real
estate investment trusts diversify their investments over various types of
property or in different geographical areas.
Investing in REITs
Publicly traded REITs: REITs whose shares are traded
on a public stock market.
Similar to stocks, Publicly Traded real estate investment trusts have a
price that this adjusted daily based on supply and demand. Publicly Traded
REITs can consist of an index of numerous REITs or one particular companies
REIT. Publicly Traded REITs represent a fully liquid investment, however,
the share price and dividend will fluctuate.
Public Non-Traded REITs: REITs that are not presently listed on a
public exchange. Available through broker networks nationwide, Non-Traded
REITs provide investors with the ability to invest in a type of REIT that
may be more stable than Publicly Traded REITs. Since they are not listed on
a public exchange, Non-Traded REITs are an illiquid investment.
REIT Mutual Funds: Mutual fund that invest in a
portfolio of real estate investment trusts.
 Types
of REITs
Equity REIT: Equity REITs directly own and operate
income properties such as apartment buildings, discount outlet centers,
mobile home parks, office buildings, industrial parks, or hotels. Income is
generated from property rents. Capital gain income is also possible if
properties are sold at a profit.
Mortgage REIT: Mortgage REITs invest their money in various types of
mortgages, usually for existing properties. In some cases REIT funds will
back mortgages on new construction. Income is generated from the interest
received on the mortgages.
Investment Uses
Many investors are attracted to mortgage REITs because of
the relatively high level of current income; REITs in general tend to
provide a current yield greater than long-term U.S. Treasury Bonds. Equity
REITs are often sought for their long-term appreciation potential, and as a
hedge against inflation. Many investors view real estate as a separate asset
class - distinct from other financial assets such as stocks or bonds - and
thus value REITs for their diversification benefits.
Possible Risks
Market risk: An investor who sells shares in a REIT could
receive more, or less, than the original purchase price. Factors, which can
influence market risk, include the general level of real estate property
values, REIT dividend payouts, management skill, broad market trends,
extended vacancies and uninsured damage losses from natural disasters.
Interest rate risk: Shares of REITs, especially mortgage REITs, are
sensitive to changes in the general level of interest rates. Mortgage REITs
respond much like bonds, generally increasing in value as interest rates
fall, and decreasing in value if interest rates rise.
REITs and REIT mutual funds are generally offered by prospectus, which
contain more complete information about including charges and expenses.
Obtain a prospectus and read it carefully before you invest.
The material is not intended as legal or
tax advice. This information has been derived from sources which we believe
to be reliable but has not been independently verified by us. The opinions
expressed herein reflect our current judgment and are subject to change
without notice. We recommend that you consult with your tax advisor and
attorney for complete details before making any final decisions.
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