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A Guide to Real Estate Investment Trusts
What You Need to Know Before You Invest in a REIT
Real estate investment trusts (REITs) are a popular tool for individuals who are considering real estate investing. For the uninitiated, however, they can cause a bit of confusion.

Here, we present the basics of real estate investment trusts—what they are, how they work, and, most importantly, if they are a smart investment for your money.

What are Real Estate Investment Trusts?
In the most basic sense, a REIT is a way to allow individual investors to buy shares in a specific type of company that owns and operates income producing real estate assets. These assets can cover everything from office buildings to apartment complexes and even warehouse or storage facilities.

One of the requirements for REITs set by the Internal Revenue Code is that a primary goal of the company must be to own income-generating properties for the long term. That's different from many other real estate investing companies, in which the goal might be more focused on buying, developing, and reselling properties over the short term.

How do REITs Work?
Because real estate investment trusts have a special tax status, they operate a bit differently than other investment vehicles. To qualify as a REIT, a company must meet a number of specific requirements.

They must pay out a minimum of 90% of their income in the form of dividends, have at least 100 shareholders (with no five shareholders owning more than 50% of the shares), and 75% of the company's gross income must be derived from real estate.

Are REITs a Smart Investment Tool?
For individuals interested in real estate investing who don't have the means to actually buy commercial real estate, REITs are one way to get into that market.

Most investors focus on one of three types of real estate investment trusts:

Equity REITs: These invest in buying, owning, and managing properties over the long term.
Mortgage REITs: These invest in mortgage backed securities, making them inherently riskier than their equity counterparts.
Hybrid REITs: These combine both equity and mortgage REIT strategies.
Benefits and Risks Associated with REITs
Many see value in the ability to buy and sell a REIT just like any other stock, making it relatively easy to get started. REITs are also regulated by the Security and Exchange Commission (SEC), which provides more transparency—at the close of the market each day, you will know the price. Finally, many equity REITs tend to see a lot of stability, producing consistent dividends in positive markets.

In a down market, however, the risks from REITs are just as evident. They are susceptible to losses over the short term, and even in up markets, the stability doesn't always translate into high growth potential. There are tax ramifications based on REIT dividends.

Real estate investment trusts can provide an attractive entry into real estate investing, but speak with your advisor or broker to make sure you understand how they work and if REITs will fit into your overall investment strategy.

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