What is a REIT and Should You Invest in REITs?
With the current housing market meltdown, it’s hard to think about investing in real estate. Moreover, the current tight credit market and lack of cash makes it even harder to buy an investment property even if you want to. This is where REIT comes in. Personally, I think it’s an attractive investment option regardless of what the market is doing short-term.
What is a REIT?
A REIT, or Real Estate Investment Trust, is a corporation that invests in real estate. To qualify as a REIT, a company must satisfy three criteria:
- It must invest most of its assets in real estate.
- Its income must come mostly from real estate.
- It must pay out 90% of its taxable income to shareholders.
When you invest in REIT, you are investing in a portfolio of real estate properties and/or mortgages, depending on the type of REIT you own.
Three Types of REITs
- Equity REITs — These REITs buy, sell, and manage real estate properties, such as apartment buildings, shopping centers, office buildings and industrial parks. By investing in these REITs, you are making money from rental income and property value appreciation.
- Mortgage REITs – These REITs invest in mortgages and make money from interest payments, not on appreciation.
- Hybrid REITs – These REITs are combination of equity and mortgage REITs.
6 Reasons Why I Think It is Good to Own REITs
I think investing in REITs is an excellent way to diversify your investment portfolio and generate income. Personally, I have about 10% allocated to REITs in my tax-sheltered accounts — i.e., 401k and IRA. Here are some reasons why I think REITs are great:
- You get to invest in real estate without a large upfront capital.
- You don’t have to deal with maintenance — i.e., answer midnight phone calls to go fix the toilet.
- You don’t have to deal with bad tenants and worry about collecting rent.
- You earn regular income in the form of dividends and capital gains distributions — this is why I don’t have REITs in my taxable account.
- REITs add another level of diversification to your investment portfolio.
- Buying and selling REITs is as simple as buying and selling stocks — much easier and faster than buying and selling houses.
Here are some more articles about REIT
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About the Author
, on Oct 22, 2008
is the owner of Moolanomy Personal Finance
. He is a licensed Realtor
specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.
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