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What is a REIT?
REIT is an acronym for real estate investment trust.
It's an organization that pools investors' money to invest in commercial
real estate.
Most REITs invest in the equity in real property,
some in mortgages and some in both. Equities have a better performance
history and are the Diva's REIT of choice.
Shares in a real estate investment trust are called
units.
The REIT's claim to fame is that it pays no income
tax on its earnings. Instead, it has to distribute 95 percent of
its net income, and the distributions are taxed to the unit holders
as dividends.
When a company such as Coca Cola, Philip Morris or
The Home Depot pays dividends, the dividends are taxed twice. First,
the corporation pays income tax on its earnings. Then, when it distributes
after-tax dollars as dividends, these dollars are taxed again to
the shareholders. That's two times -- one time too many for the
Diva.
REIT -- what's the upside?
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You can invest in commercial real estate
even if you can't afford to buy the whole apartment building
or strip mall.
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Risk can be spread over many real estate
investments in many geographical areas.
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Units are bought and sold like stocks --
on the New York Stock Exchange and the other major exchanges.
You can also buy them in mutual funds and variable annuities.
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The investment provides an income stream.
The income is taxable, so you might want to consider it for
your individual retirement account.
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Real estate can serve as an inflation hedge.
REIT -- what's the downside?
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Real estate is cyclical -- unlike Coke
and cereal, which sell in good times and bad. Real estate investments
can tank if the economy takes a dive. Be prepared for a roller
coaster ride.
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They're trickier to analyze than stocks.
REIT earnings are not always reported the same way, so traditional
analysis, such as the P/E
ratio -- where price is divided by earnings -- can be meaningless.
FFO, or funds from operations, is a more meaningful number than
earnings for REITs, and the price divided by the funds from
operations, or P/FFO, is a better valuation ratio than P/E.
For more information on REITs, visit the Web site
of the National Association of Real Estate Investment
Trusts.
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DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
