For those investors who like the idea of the possible large rewards available in real estate investment, a REIT offers a way to get in on the action without having to deal with many of the headaches. Simply investing in the REIT allows the investor to avoid some of the risks inherent in real estate investment, such as tenants, taxes, foreclosures, and legal liability.
Real Estate Investment Trusts are simply corporations, publicly or privately held, who operate, own or finance income producing real estate. As a corporation, REITs are required to return 90% of taxable income to its investors.
Benefits of Real Estate Investment Trusts (REIT)
As far as investors go, REITs offer a very hands-off approach to real estate investment. For all intents and purposes, they are comparable to a standard mutual fund. Investments are pooled and the REIT purchases and operates income-producing investment properties, returning the bulk of the profits back to the investors. The REIT assumes all risk associated with owning property: Foreclosure, tax issues, insurance, tenants, legal liability and so on. The investor is only on the hook for the money put in.
Typically, Real Estate Investment Trusts return between 6% and 7% on money invested, due in large part to the real estate investment market’s stability and tendency to appreciate. As with any investment, nothing is guaranteed, and much lower returns are possible. On the other hand, some have returned as much as 15% over a three year period. One of the downsides is that dividends paid from REITs are usually fully taxable as income.
Not everyone believes in the stability and earning potential of REITs, so all investors are well advised to adequately research any investment decision and seek professional advice where necessary. Dave Ramsey, for example, frowns on Real Estate Investment Trusts and advises that one’s portfolio contains no more than 10% REIT funds. His advice would be to put that same money in a strong growth mutual fund.
Portfolio Diversification – REITs Should Be Just One Egg in Your Basket
As any financial planner or advisor will say, all portfolios should be well balanced and diversified. While investing in a Real Estate Investment Trust may be a good idea, always make sure there are other investments to fall back on should the REIT fail. Remember- most investments aren’t guaranteed (notable examples being government bonds and CDs). A balanced portfolio would include stocks, bonds, mutual funds and REITs and/or property investment.