Tuesday, March 3, 2009

REITs are Better Than Stock

The Good and Bad of Real Estate Investment Trusts

Real Estate Investment Trusts, or REITs, are an avenue of investment that many people have heard of, but have not taken a good look into. Let's take that look now.

First, you need to understand what a REIT is. It is generally a property management investment. You fund a property management company and let them run a real estate asset, with you getting dividends from the profit. For example, a commercial real estate REIT may own a shopping center or strip mall. When you purchase shares of that REIT they are going into building and maintaining that structure. As tenants move in and rent those spaces, and the REIT profits, the profits come back to you in the form of dividends. This is also the case for residential real estate interests like housing developments, apartments and condominiums.

So now let's look at the good and bad sides of this investment option.

Dividends – Unlike other stocks and mutual funds, REITs come with some very strict rules for how their profits can be used. As profits come into a REIT, at least 90 percent of that profit must go right back to the shareholders in the form of dividends. That means most REITs always see a nice annual return on the initial investment, averaging 6% or more.

Their Own Entity – If you have noticed, the stock market has an all for one kind of approach to things. Often if one area of the market goes down, the rest follows, hitting you across the board. But REITs are their own creature. By not being as strongly tied to other investments and stock fluctuations, they can hold strong even when the rest of the market is on a roller coaster ride.

Solid Starting Platform – If you are not a major investor in general, REITs may be the way to go to begin your investment portfolio. For the most part they are strong and stable purchases and can bring in a good, steady profit for years to come.

Constant Investment – Since REITs revolve around property investments, there is always something tangible – a piece of land, homes, apartments or businesses. Usually these also have long-term leases, which means there will be money coming in from those leases to feed your dividends.

Bad

There aren't that many bad points to REITs, but here are a few:

Slow Growth - If you are looking for a major growth in your REIT, you likely won't see it. Since only 10% of the money made can be put back into the REIT (as 90% has to be paid out as a dividend) that means there is a lot less going back into the business to make it grow more quickly.

Down Times – Just like any other investment, there is always the chance that a downturn in real estate will make it where your REIT does not bring in a profit for the year.

Despite these few bad points, REITs are worth looking into. Start by going to a full service website like REITBuyer.com. There you can get information about REITS, tools and research help as well as education and advice before you buy. When you're ready, they are also investment real estate brokers who can take care of the entire transaction.

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