Real Estate Investment Trusts for Income-Producing Investments
Real estate investment trusts (REITs) are a special breed of stock. A REIT is an investment that has elements of both a stock and a mutual fund (a pool of money received from investors that’s managed by an investment company).
A REIT resembles a stock in that it’s a company whose stock is publicly traded on the major stock exchanges, and it has the usual features that you expect from a stock — it can be bought and sold easily through a broker, income is given to investors as dividends, and so on.
A REIT resembles a mutual fund in that it doesn’t make its money selling goods and services; it makes its money by buying, selling, and managing an investment portfolio of real estate investments. It generates revenue from rents and property leases, as any landlord does. In addition, some REITs own mortgages, and they gain income from the interest.
The main advantages to investing in REITs include the following:
Unlike other types of real estate investing, REITs are easy to buy and sell. You can buy a REIT by making a phone call to a broker or visiting a broker’s website, just as you can to purchase any stock.
REITs have higher-than-average yields. Because they must distribute at least 95 percent of their income to shareholders, their dividends usually yield a return of 5 to 12 percent.
REITs involve a lower risk than the direct purchase of real estate because they use a portfolio approach diversified among many properties. Because you’re investing in a company that buys the real estate, you don’t have to worry about managing the properties — the company’s management does that on a full-time basis. Usually, the REIT doesn’t just manage one property; it’s diversified in a portfolio of different properties.
Investing in a REIT is affordable for small investors. REIT shares usually trade in the $10 to $40 range, meaning that you can invest with very little money.
Although they tend to be diversified with various properties, they’re still susceptible to risks tied to the general real estate sector. Whenever you invest in an asset (like real estate or REITs in recent years) that has already skyrocketed due to artificial stimulants (in the case of real estate, very low interest rates and too much credit and debt), the potential losses can offset any potential (unrealized) income.
When you’re looking for a REIT to invest in, analyze it the way you’d analyze a property. Look at the location and type of property. If shopping malls are booming in California and your REIT buys and sells shopping malls in California, then you’ll probably do well.
However, if your REIT invests in office buildings across the country and the office building market is overbuilt and having tough times, you’ll have a tough time, too.
The real estate market has generally bottomed although weakness should remain for a few more years before a strong rise in real estate values appears. Many of the dangers of the housing bubble have passed, and investors can start looking at real estate investments (such as REITs) with less anxiety.
Choosing REITs with a view toward quality and strong fundamentals (location, potential rents, and so forth) is still a good idea.