Wednesday, April 22, 2009

Why REITs?

By: Tsu-Han (Ina) Chang

Real Estate Investment Trust (REIT) is a real estate company, private or public, that has a fixed number of shares which are traded in a secondary market. REIT mainly invests in real estate or real estate mortgages and its shareholders are paid in dividends. In the U.S. REIT are required to distribute approximate 90% of its taxable income in dividends to its shareholders every year.

There are two major categories of REIT; Equity REIT and Mortgage REIT:
Mortgage REIT, makes loans secured by real estate, but they do not actually own or operate the property, reducing risk and liability faced by the firm. However, Equity REIT is different from Mortgage REIT in that it takes ownership of the property, taking on the liabilities associated with the investment. However, it is important to remember that investors only hold shares of the firm, and not shares of the individual investments made by the firm.

What are some of the reasons for investors to think about investing in REITs?
1. Diversification: The properties associated with the REITs are tangible assets so it is considered to be more secure than other publically traded stocks. Therefore, REIT stock prices react differently to the entire stock market in that if the general market is doing poorly, REITs may actually be doing well. Therefore, including shares of REIT in an investment portfolio is a good way to minimize losses in the overall stock market.
2. Dividends: REITs must distribute approximately 90% of their taxable income which allows REITs to avoid corporate tax rates, as well as guarantee the investors or returns on their investments.
3. FFO: Is the measure used to evaluate the performance of REITs, because this measure is based on the operations of the firm, it is considered to be a more accurate measure of the performance of the company.

References:
http://en.wikipedia.org/wiki/Real_estate_investment_trust
http://www.investopedia.com/articles/04/030304.asp
http://www.boston.com/business/markets/articles/2009/04/19/four_reasons_for_looking_into_reits/

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