REIT’s are real estate investment trusts. These trusts are similar to mutual funds but are restricted in their portfolio holdings to only the real estate market. The real estate holdings can include land, industrial buildings, shopping malls, commercial properties, office buildings, entertainment properties, healthcare facilities, financial properties, public storage facilities or residential housing. Investment gains occur when the real estate holdings appreciate in value and when the REIT collects rent or receives mortgage interest. Investors purchase shares of the REIT, thereby owning a portion of the real estate assets within the investment trust.

The “REIT” Legislation for the Investor

In 1960 Congress passed legislation that provided small investors the opportunity to invest in shares of large, income-producing real estate. This legislation provided for the development of real estate investment trusts. Federal regulations governing REIT’s favor investors in four key areas. First, REIT’s must pay at least 90 percent of their annual taxable income as dividends to their stockholders. Investors love dividends. Second, 75 percent of the REIT’s assets must be in real estate. Investors love tangible assets backing their investments. Third, REIT’s must derive at least 75 percent of their income from rent or mortgage interest. Investors adore companies with a steady, monthly cash flow. Lastly, some REIT’s qualify for the new 15 percent capital gains taxation rules. All investors want fewer taxes.

REIT Market Segment Strategy

With nearly 300 real estate investment trusts to choose from, investors may select the REIT that matches their investment strategy. REIT’s provide investment flexibility by allowing investors to select a REIT that focuses on a particular region or market sector. For example, an investor may chose a REIT that invests the majority of its holdings in a particular region where real estate prices may be increasing rapidly. Another investor may select a healthcare REIT, believing that rents for healthcare facilities will boom in the near future.

Types of REIT’s

Most REIT’s invest in the following market sectorslodging, resorts, industrial, office, health care, retail, public storage, entertainment, mortgage and residential. REIT’s are traded on the NYSE, NASDAQ, ASE, OTC and PSE. All of the current top ten REIT’s are traded on the NYSE. There are some private REIT’s that are not publicly traded.

Top Ten REIT’s

REIT Name REIT Symbol Market Sector
Apartment Investment AIV Apartments
Archstone Smith ASN Communities
Boston Properties BXP Office
Equity Office Properties EOP Office
Equity Residential EQR Apartments
Kimco Reality KIM Retail
Plum Creek Timber PCL Timber
ProLogis PLD Industrial
Public Storage PSA Public Storage
Simon Property Group SPG Retail

REIT Investment Advantages

Medium Liquidity A REIT is much more liquid than actual real estate. Similar to mutual fund investments, buying and selling REIT’s occurs at the end of the trading day at the last closing price. An investor may instruct their broker to buy the REIT in the morning, but must wait to see what the cost of each individual share is at the end of the trading day.
High DividendsExpect high dividends with a REIT. The average REIT provides a dividend of 6 to 8 percent. Most REIT’s pay their dividends quarterly. Dividends are not guaranteed.
Low RiskReal estate investments have an excellent track record for appreciating in value. Most investors consider real estate as a very safe long-term investment. REIT’s suffer less price reaction to corrections in the stock market than most stocks but are subject to rent and value depreciation. Since at least 75 percent of the investment is in tangible assetsland and buildingsinvestors in REIT’s enjoy more security. Many REIT’s have tenants with long-term lease contracts that continue to produce income when the economy suffers a downturn. Rent is one of the payments that most renters and lessors meet each month even during the most difficult times in order to avoid eviction.
Market SelectivityREIT’s allow investors the flexibility to choose a REIT by region or market sector. This enables investors to invest in a sector that may be experiencing sharp income growth from increasing rents or to invest in a region that may be experiencing dramatic appreciation of real estate values.
Tax EfficiencySince REIT’s must pass at least 90 percent of their income to the stockholders, they enjoy a huge tax break. The dividend income paid to investors of some REIT’s also qualify for the new, lower 15 percent capital gains tax.
DRIP OptionSome REIT’s offer a dividend reinvestment plan (DRIP) which eliminates or minimizes the transaction fees for reinvesting dividends.

REIT Investment Disadvantages

Cyclical Nature of Real EstateDownturns in the real estate market can decrease the value of a REIT investment. For the short-term investor this can have a significant impact.
Slow GrowthThe average REIT grows at a slow pace. Since government regulations require distribution of most of a REIT’s earnings to shareholders as dividends, the REIT is unable to reinvest earnings to spur growth. In fact, short-term annual earnings growth falls below the S&P 500 index. Long-term growth shows slightly higher returns than the S&P 500.

REIT Investment Summary-Risk vs. Reward

The risk associated with investing in a REIT is low. Real estate usually appreciates in value. However, real estate is highly subject to rent and value depreciation. The expected reward for a REIT investment is usually realized after the long-term. REIT’s offer stable attractive dividends and modest long-term capital appreciation. Over the past ten years, REIT’s averaged over 14 percent gains.

Copyright 2006 Barry Preusz

More information about REIT investing or real estate investments can be found at http://www.investing-trading-books.com/index.html.

Share This