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What is a real estate investment trust (REIT)?
Real estate investment trusts, referred to as REITs, are companies that own and manage income-generating real estate or related assets. Investors can invest in the collection of properties a REIT company manages, and benefit from the dividends earned. The investors also bear the cost of taxes and any other losses incurred.
REITs are a good way to build up your financial portfolio without buying real estate. The main difference between a REIT and a real estate company is that a real estate company develops properties to resell them, while REITs acquire and develop properties to own and manage.
- Equity REIT companies procure business properties such as shopping malls, hotels, office buildings and commercial buildings, then rent out the spaces. After deducting all operational costs, equity REITs pay dividends to their shareholders annually. The dividends also include any appreciation of the property.
- A mortgage REIT or MREIT, provides mortgage financing or obtains mortgage-backed securities and earns income from the interest from such properties. Mortgage REITs can either be on residential or commercial properties. In fact, some REIT companies deal with both. Due to their high potential for leverage, mortgage REITs are a rather risky investment, as they gain profits from interest, which is changeable.
Whether it’s an equity REIT or a MREIT, it would be ideal for an investor to first establish whether a REIT is private or public. A public REIT is registered with the Securities and Exchange Commission and trades on national stock exchanges. Private REITs do not need to disclose as much information as public REITs do. This could lead to investors making the wrong investment decision. Public REITs offer investors more exposure to properties across the world than do private REITs.
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REITs provide an opportunity for average investors to own shares of real estate. At the same time, investors benefit from having the properties managed on their behalf by a team that markets the properties, collects rent, maintains the facilities, and draws up tenant agreements. The management can then decide whether the profits accrued will be invested back into the company. Meanwhile, all the investor has to do is collect his dividends.
REITs have shown a steady and improved performance, mostly because of the continued appreciation of real estate. Inflation and short-term interest volatilities have little or no impact on REIT prices and commercial real estate. They are therefore more predictable than other stock items such as bonds. REIT taxes are fair and clearly spelled out.