If investing in real estate appeals to you but you are not so well heeled that you can go shopping for investment properties like they were appliances, you may want to give some thought to investing in one or more real estate investment trusts (REIT). As you would with shares of common stocks, you can buy and sell different REITs, and having REITS in your portfolio of investments could be a good way to add some diversification. Another attraction for REITs is that you can invest in them with relatively small amounts of money, as compared with the sums required to buy the real estate itself.
There are two basic categories of REITs, although even within each category there are variables to consider. An equity REIT owns a mix of stocks and one or more pieces of property, often specializing in a particular type of real estate, such as shopping centers. As the name suggests, a mortgage REIT owns debt instruments, buying existing mortgages, collecting payments on them, then passing on the money to investors.
The fortunes of the two kinds of REITs rise and fall with the markets in different ways. Equity REITs prosper in a strong real estate market and when the values of stocks are on the rise. Shares in mortgage REITs, combining the features of real estate and bonds, tend to trade with the bond market, so that when interest rates rise, mortgage REIT shares generally fall along with bond values.
The federal tax code requires a REIT to pay investors at least 90% of its taxable income each year. This means that REITs pay little or no corporate income tax, thus improving on the tax treatment of dividends, which can be taxed twice, with both the company and the shareholders owing taxes on them.
The end result is that REITs potentially can have relatively high returns. Within the general category of REITs, there are significant differences in such features as levels of risk and the limitations on when an investor can sell his or her shares. As with any investment, you should collect and understand all information for any REITs being considered before investing.