A real estate investment trust (REIT) is an investment option that closely resembles a mutual fund. However, rather than compiling shares of securities, these funds invest in real estate properties.
How does a REIT work?
While in a mutual fund, the success of the stocks included average out to the fund’s success, the REIT works on an income model. The styles of REIT breakdown according to their income structure, and they are:
- Equity
- Mortgage
- Hybrid
An equity REIT earns income from sources such as rentals. They often will include commercial properties or tracts of land and then pool and disperse the income earned. Mortgage REITs have mortgaged properties.
The hybrid, of course, is a combination of the two.
What are the advantages of investing in REITs?
Most consider REITs a strong inclusion in a portfolio for many reasons, but among the most attractive is their inherent:
- Liquidity: By law, REITs must disperse at least 90% of their income to investors. Many choose to distribute higher amounts, but they represent regular cash income.
- Stability: Since they use extremely stable assets, such as cash, Treasury notes or real estate, they hold value well. These assets are also vulnerable to certain market fluctuations.
- Transparency: All investments included in REITs are detailed and well-documented for investors to review.
These benefits come with a few notable drawbacks, the most notable being returns are taxable as income.
Is an REIT right for my portfolio?
Your investment strategy is highly personalized and the result of a great deal of work. You should discuss specific investment opportunities with your team at length before taking any actions. But keep in mind, fraud is prevalent in any security, and you may wish to fully investigate an opportunity before investing.
