Is A Real Estate Investment Trust (REIT) Right for You?

If you are looking for a way to profit from real estate and property without investing exorbitant amounts of money in illiquid, difficult-to-manage rental properties, a Real Estate Investment Trust (REIT) might be what you need. There are many infamous real estate investors (think Trump) that have made a fortune buying and selling real estate. For those everyday investors who want to do a little more with their money without spending a fortune to invest, a Real Estate Investment Trust might be an area that makes financial sense.

What Is A REIT?

A Real Estate Investment Trust is an avenue that allows everyday investors to put money into commercial real estate, condos, apartments, or almost any other type of property.  REITs are required by law to distribute at least 90% of their income to shareholders as dividends.  In exchange for being required to pay out most of their income to shareholders, real estate investment trusts pay no corporate income tax.  The dividends, however, are taxable to investors as regular income.  Investors in REITs can buy or sell their shares like they would do with any other stock.

Which Type Is Right For Me?

There are actually three kinds of real estate investment trusts.

Equity REITs

Equity REITs are by far the most common form of REIT fund.  Equity REITs invest in various types of income-producing commercial properties. The income is then shared in investor dividends. Profit will be based on numerous criteria including what type of property it is and how much income it generates.  Property management skill, property type, and geographical location are key determinants of returns in this segment of the market.  Shares of Equity REITs tend to appreciate only moderately over time:  most of the return comes from cash flow.

Mortgage REITs

Mortgage REITs are much less common than Equity REITS.  They either buy up pools of mortgages made by others or make mortgage loans directly.  As you might have guessed, they haven’t performed so well the last few years.  Mortgage REITs are estimated to make up only about 10% of all REITs.

Hybrid REITs

Hybrid REITs are quite rare.  A hybrid REIT is merely a REIT that invests both in actual real estate properties and mortgage loans.

REITs are a great way to achieve broad geographic diversification for a minimal initial investment.  It is possible to own real estate in all 50 states and dozens of foreign countries with just one or two funds.  It would take tens of millions of dollars to achieve that kind of diversification investing in properties directly, and that’s assuming you could actually figure out how to manage them efficiently.