Tuesday, February 3, 2009

Understanding REITs

Understanding REITs

By David Norton

Many people have heard of the concept of a REIT, but few actually know the dynamics of such an investment. Being so crucial to the markets, it is essential to understand REITs and see how they could be implemented into one's portfolio. 

The acronym REIT stands for real estate investment trust, and investing in these securities is a simple yet interesting concept. To define REITs, one could say they are a grouping of holdings that sell on the major exchanges and invest in real estate directly. Congress has enacted special tax incentives for corporations, in that if the REIT firms redistribute 90% of their income to shareholders, they do not have to pay corporate income tax. This usually creates very high returns for the investors as well as favorable tax policies for the companies. A win-win for both sides.

There are three main classifications of REITs. Equity REITs invest in and own properties directly. Their revenue comes from the various rents that these properties produce. Mortgage REITs invest in the ownership of the properties that Equity REITs directly deal with. They finance to owners of real estate, thus the majority of their revenues come from interest earned. Lastly, Hybrid REITs are a combination of Equity and Mortgage REITs. These REITs own and manage properties but they also lend out to others and generate money through the interest on these ventures. 

Owning REITs can prove to be a good diversification strategy in an investment portfolio. And, though it would be irresponsible to rely on these investments solely, owning one of these securities could be a lucrative prospect. Many people are shying from real estate in general in todays current market, but lets not forget how lucrative this industry was a few years back. In fact, many REITs are "cheap" now, in that they are trading at near all time lows. With notoriously high dividends, these REITs could prove to be a way to rebuild a struggling portfolio after our latest economic downturn.


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