Three Main Uses Provides Income Capital Appreciation Diversification

What is it?
What if you wanted to invest in the real estate sector but you either already have a house or you don't have enough money to buy one right now? The answer is REITs. REITs sell like stocks on the major exchanges and invest in real estate directly through properties or mortgages. A major advantage to a REIT is they receive special tax considerations. Also, they typically offer investors high yields as well as a highly liquid method of investing in real estate. There are a wide variety of different REITs but you can break it down into 3 main categories:

- Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

- Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

- Hybrid REITs: Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages

There are over 300 publicly traded REITs operating in the United States whose average daily trading volume has more than quadrupled during the last three years, reaching over $280 million dollars. The average dividend yield of a REIT is 9-12%.

Objectives and Risks: REITs can offer a wide range of objectives within the real estate sector. They allow you to focus on different sectors of real estate like residential versus commercial. They even allow you to target different geographic areas of the world. REITs have often been thought to closely follow the performance of small to medium cap stocks.

Still, no matter what the market does, the performance of a REIT is determined by the value of its real estate assets. This is one major advantage to a REIT, its performance is not correlated to other financial assets like stocks and bonds. Because of this REITs are usually less volatile and provide some degree of inflation protection.

How to Buy or Sell it:
As we mentioned REITs sell like stocks on the major exchanges. Therefore they can usually be bought through a brokerage, either full service or discount. Commissions to buy REITs are usually the same as common stock fees. There is no minimum investment for most REITs although you may need to buy the shares in even blocks of 10 or 100. Also, many brokerages require clients to have at least $500 to open an account and trade stocks or REITs.

Strengths:

dividends are higher than those of common stocks. the performance of a REIT follows the real estate market closer than the stock market.

Weaknesses:

dividends are taxed at the same rate as income tax, so the higher dividends mean you will likely pay more taxes on it. mortgage REITs tend to do poorly as interest rates are rising.

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