REITs as Investments

What Is It
REIT is an acronym for Real Estate Investment Trust. Companies are allowed to choose their tax structure, and in the case of a REIT, it means the company has elected to reduce or eliminate its corporate income tax by distributing at least 90% of its earnings to its shareholders. and as the name implies, REITs are focused on real estate investment only. The shareholders bear the tax burden of the distributed earnings, just a shareholder would bear the tax burden of dividends, or capital gains. But in the case of dividends generated via a REIT, the investor almost always is taxed at a higher rate than the tax rate applied to regular dividends.

Types of REITs
REITs come in two flavors - those which invest in real estate and earn income via renting and/or selling properties, and those which invest in mortgages both residential and commercial. Some REITs may invest in a mix of both.

How to Invest in REITs
Investing in REITS is straightforward. An investor can purchase a mutual fund which holds a basket of REITs, or, invest in individual REITS. The mechanics of investing is no different than investing in any other company. If you've ever purchased or sold shares of a company's common stock, you'll have no difficulty investing in REITs.

Why Invest in REITs
An investment in a REIT is a bet on real estate in general, i.e., is real estate (or mortgages secured by real estate) expected to perform well in the future. If an investor believes that real estate will be in demand, a REIT is a relatively simple way to participate in this demand. Further, an investor can choose a REIT which specializes in a certain type of real estate. Thus if an investor wants to avoid office buildings, but likes apartments, there's a REIT for that.

An additional benefit of investing in a REIT is that many REITs offer dividend reinvestment programs, or DRIPs. These programs allow an investor to automatically reinvest dividends into the same company, thereby compounding investment returns.

Specialty REITs
Within the REIT universe, there are companies which focus on a unique segment of the real estate market, for example health care facilities, apartments, or shopping malls. An investor wanting to participate is a particular sector can often find a REIT which is in their area of expertise.

Summary
REIT investing allows an individual investor to participate in real estate without the management challenges presented by real estate. Individual ownership of real estate requires a high level of partcipation, as the asset itself (the building) is subject to wear and tear. For all but the most sophisticated investors, individual ownership of real estate proves to be difficult. A REIT offers the advantages of real estate investing, but without the chore of real estate management.