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. As the name implies, REITs invest in real estate related activities only. The shareholders bear the tax burden of the REIT, just a shareholder would bear the tax burden of dividends of a company like IBM, or capital gains generated by a company like Apple. But in the case of a REIT, the dividends are often taxed as ordinary income as opposed to the lower tax rate applied to qualified dividends. So whereas the REIT dividend may look attractive initially, investors should bear in mind that the dividend will, in most cases, be taxed more heavily.

Types of REITs
REITs come in two broad flavors - those which invest in real estate equity and earn income via renting and/or selling properties, and those which invest in real estate debt (mortgages) both residential and commercial. Some REITs may invest in a mix of both. Of these two categories, the mortgage REITs are a relatively new form.

Traditional REITs
Traditional REITs invest in real estate and generate income the same way a solo investor might generate income from a rental property. That is, through rental income and perhaps the eventual sale of the real estate. As real estate comes in many forms and functions, REITs tend to specialize in a particular segment of the real estate world, because managing an apartment, for example, is much different than managing an office building. Below is a partial list of REIT segments.

Retail REITs
These manage shopping centers, malls, and other retail locations. Chances are you've visited a shopping center managed by a REIT. And, this type of REIT explains why certain shopping centers appear to be a clone of a shopping center in another part of the country. The REIT managers are applying the same management techniques to similar malls.

Healthcare REITs
These focus on healthcare facilities such as skilled nursing facilties, medical office buildings, senior living complexes, and hospitals. With health care becoming an ever larger part of the U.S. economy due to the aging population, management of health care facilites and management is a growing industry.

Office REITs
These manage everything from a skyscraper in New York to the local automobile insurance office. Again the specific nature of the REIT allows it to apply the same management techniques across a variety of office properties.

Residentail REITs
These are involved with housing, and almost always high density housing such as apartments in large population areas.

Specialty REITs
These are the ones involved in lesser known but still prevalent forms of real estate. A perfect example of this is self storage centers.

Mortgage REITs
These are relatively new, and several are the result of the finanacial collapse of 2008, during which the more established buyers and investors in mortgages dwindled. The purpose of mortgage REITs is to purchase mortgage securities and capture the interest rate spread.

Summary
REIT investing allows an individual investor to participate in real estate without the management challenges presented by real estate. Further, investors interested in macroeconomic trends can focus their investments on certain sectors of the economy. For example, a contracting economy might cause an investor to shy away from a REIT involved in timber harvest, while an expanding economy might compel an investor to look at REITs focused on the hotel industry. 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, and selective real estate investing, but without the chore of real estate management.