What Is A REIT Actually? - Easy Answers To This Complicated Question

By Robert Book

If you want to invest in real estate, yet do not actually want to buy, own and manage property, REIT is a great idea for you. Now what is a REIT? It stands for Real Estate Investment Trust, which is somewhat like a mutual fund. The difference is that while a mutual fund deals with stocks, REIT deals with real estate.

It is a collective investment mechanism that was created in 1960. Since then, it has became a highly popular investment choice with high dividends from property without the hassles of individual lease and rentals. The National Association of Real Estate Investment Trusts (NAREIT) figures quoted that the primary U.S. REIT index reported a return of over 34% in 2006, which is higher than any other equity targets in a seven year span.

If you want to know what is the REIT investment process then you need to know that it involves creating a trust with investors' money to fund property shares. REIT's are mostly equity trusts that invest in hard property, and are involved in generally big real estate projects like malls, offices, theaters, industrial structures, sports arenas etc. REIT's are either a public entity, which is traded on stock exchanges, or are private trusts. There are three types of REIT:

- Equity: Herein the trust buys, develops and manages real state properties and it doesn't own real state loans. Their profits are in the form of rental returns from the properties.

- Mortgage: Herein the trust buys and manages real estate loans, though it doesn't own properties. Their profits are derived from interest on their mortgage loans.

- Hybrid: As the name suggests, they are a bit of both the above types of REIT's. To be more precise, it both owns and manages real estate loans and properties.

In the USA a real estate investment system can qualify as REIT if its dividends to investors are at least 90% of pre - tax profits. Once it attains status, corporate tax on that part of the profit is waived with the added advantage of no double taxation. If it pays 100% of profits as dividends, corporate income tax is totally waived, though this comes with the catch of a growth constraint due to a check in retained profits.

You must also understand some of its other disadvantages, which include risk of interest rate fluctuations, slow cash flow, and low tenancy and rental returns, depreciation of real estate prices etc.

However, there are ways to go around these problems and you cannot forget that despite drawbacks, such real estate investment trusts ensure more than four times the dividend of an investment bond. So this also somewhat offsets the issue of long term growth vis-à-vis regular returns.

What's more, are the statistics that show a rise in real estate prices when there is a fall in share prices and vice-versa. Hence, any slump in the real estate market can be offset by a rise in share prices.

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Robert Book

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