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What in the world
is a REIT?
By Daniel
Jimenez • Bankrate.com
Have you ever wanted to be a real estate mogul? Maybe
you really don't care about investing in real estate, but rather
you just like the way the word "mogul" sounds. It sounds tempting,
yes, but you're probably a bit wary remembering the 1980s market
slump that left land barons doing their shopping from the discount
rack at the Gap. Well, there is a way for you to invest in real
estate with fewer of the usual risks. Small investors can get in
on the real estate market by buying shares in a Real Estate Investment
Trust.
REITs (rhymes with "beats," not "bites") pool investors'
money to buy apartment buildings, shopping malls, office buildings
and other properties. An equity REIT makes you a landlord of sorts,
since you collect the dividends from people paying their rent.
Your other option is to invest in a mortgage REIT.
Owning a mortgage REIT means that you're lending money to builders
and property owners, leaving you at the mercy of interest rates
and loan defaults. Investors profit by collecting the dividends
from the loan interest.
REIT shares are called "units" and they are traded
on the major exchanges just like any other securities. What makes
these investments truly unique is that REITs don't pay income tax
on their earnings as long as they distribute 95 percent of their
income to holders. Of course, the checks YOU receive from those
earnings are still going to be taxed, but at least you don't have
to worry about the dividends getting taxed twice, as is often the
case. Corporations normally pay taxes on their earnings and those
dollars are taxed again when they're distributed as shareholder
dividends.
Equities have a better performance history than mortgages,
so this article will focus on them. One of the benefits of equities
is they're way more liquid than buying a property yourself. Another
plus is that these investments are considered inflation fighters.
That's because investors don't have to wait years to get a big return
on their money, and they'll hold REITs even when inflation is high.
Finally, REITs are diversified by their very nature, either by geography
or the type of properties, so you run less risk than if you bought
a building and rented it out to some nice college boys who now refer
to it as The Animal House.
The problem with REITs is that the real estate market
runs in cycles. Things are either very good or very bad, depending
on the state of the economy. In fact, this sector has been slumping
the past two years. Another thing you have to watch out for is that
roping the right REIT (try saying that three times fast) is a tricky
business. Different REITs figure earnings differently, so comparing
them via their price/earnings ratios won't do you much good. Instead,
experts recommend that you check the price-to-funds from operations
(FFO) ratio.
The Cohen & Steers Special Equity fund was the top performing
realty stock fund in 1999, according to Morningstar.
The fund had an annual return of 28.8 percent last year. For a full
list of mutual funds that invest in REITs, visit the Web site of
the National Association
of Real Estate Investment Trusts.
-- Posted: March 8, 2000
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