Real estate investment trusts (REITs) are for-profit trusts
established by Congress in 1960. Their purpose is to give
small investors an opportunity to invest in large,
income-producing properties.
Stocks of many public REITs are available on major stock
exchanges and offer investors an efficient way of investing
in real estate. Each shareholder earns a pro-rata share of
the REIT profits. There are also private-owned REITs which
operate in much the same manner.
Overall, these trusts are definitely a long-term investment
strategy, but a good one for people who don't have the time
or inclination to be full-time investors. Within the public
and private REIT categories there are several types of
trusts:
Equity REITs. These trusts own and operate income-producing
properties (e.g. shopping centers, apartments, office
buildings, warehouses, hotels, etc.). They may specialize
in a certain market sector and in a certain geographic
location, or they may invest nationally.
Mortgage REITs. These trusts concentrate on the financing
end of the business. They tend to be real estate property
owners and operators or, they provide indirect credit
through buying loans (e.g. Ginnie Mae mortgage-backed
securities, etc.). The revenue from these latter trusts
comes mainly from interest earned on their mortgage loans.
Hybrid REITs. These trusts combine the investment
strategies of both equity REITs and mortgage REITs.
Qualifications for Public REITs To qualify as a public
REIT, a company must, in general: Pay at least 90% of its
taxable income to its shareholders every year. Have at
least 100 shareholders. Invest at last 75 percent of its
total assets in real estate. Derive at least 75% of its
income from rent or mortgage interest from properties in
its portfolio.
Advantages of Public REITS.These trusts have several
advantages: There is no required minimum. They have a lower
risk compared to stocks. They are a good income source and
provide a consistent stream of income. No public market
fluctuations As of 2005, all REITs had produced a 10.68%
return over a 20-year period. (Source: National Association
of Real Estate Trusts) REITs provide good dividends, but
they are taxable) They offer diversification and, thus,
more safety. They offer high liquidity; it's easy to enter
and exit a REIT.
A REIT corporation or trust generally doesn't pay corporate
income tax to the IRS or to the state.
Disadvantages of Public REITs. A downturn in a specific
investment area can seriously damage a REIT investment.
However, this possibility can be reduced by investing in
REITs that own diversified companies within a variety of
industry sectors.
Another disadvantage of public REITs is that they generally
don't perform as well as the stock market on a long-term
historical basis. Privately-Owned REITs These trusts
possess all of the advantages of public REITs. However,
they tend to generate higher income and pay out higher
dividends (6-7% compared to a pubic REITs' 5-6%.
In terms of disadvantages, the upfront fees can be higher
than with public REITS and such trusts are also not as
liquid. In other words, it can be tougher to cash out than
with public REITs.
A third potential disadvantage is limited transparency;
that is, investors may not know exactly what the trustees
are doing on a day-to-day basis. Methods of Investing in
REITs You can buy shares of individual companies, or you
can invest in diversified REIT mutual funds. It's very easy
to invest through such vehicles as an IRA, Keogh, etc. You
can also invest through borrowed money to buy REIT shares
on margin.
Key Point: Use REITs for long-term investing strategy.
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg is the creator of the renowned "Buyers
First" Program. His deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
No comments:
Post a Comment