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March 14, 2008
REIT
Real Estate Investment Trust

Investors can buy, sell and trade shares of a REIT just like they would normally trade stock. REIT stands for “real estate investment trust” and by investing in this type of trust, you are investing in real estate. It can be commercial real estate, apartments, condos, homes, or any other type of property. This type of trust specifically invests in properties that produce income and pass on the profit to investors in the form of stock dividends.  They must distribute at least 90% of any profit to qualify for preferential tax treatment.

A REIT is a real estate company that offers common shares to the public and is similar to stock investing in that REIT stock is similar to any other stock that represents ownership in an operating business. There are three different forms that this trust can take including equity, mortgage, and a hybrid of both. (Mortgage REITs are finance companies that use several hedging instruments to manage their interest rate exposure) To qualify with the IRS, the real estate company must agree to pay out in dividends at least 90% of it taxable profit.  Once the company has this status it avoids corporate income tax. Typically a regular corporation makes a profit, pays their taxes on that profit, and then the corporation decides how to allocate its after tax profits between dividends and dividend reinvestment.

Real estate investment trusts are dividend paying stocks that focus on real estate.  If you are an investor who is seeking income, then you consider them along with the high-yield bond funds and dividend stocks.  REIT stocks also require both “top-down” and “bottom-up” analysis.  These are terms often used when picking stocks, where top-down starts with an economic perspective and bets on sectors or themes and bottom-up focuses on fundamental analysis of specific companies. From a top-down perspective, they can be affected by anything that impacts the supply and demand of the property. (Examples include interest rates, job growth, and population) If there is a rise in interest rates, this is typically good for an apartment real estate investment trust, since people prefer to remain renters at this time, instead of purchasers of new homes.

Just like portfolio diversification, a REIT’s diversification can provide some protection. Things effecting individual properties such as downturns in the industry, local markets, and occupancy rates are protected due to the fact that most REIT’s have many properties ranging in size, function and activity. They are diversified like an investor’s portfolio should be.   They can however, be complicated and the consultation of a professional investment advisor is recommended.  Like all other investments, they too carry the risk of loss of investment.

If you are interested in learning more, continue to utilize online resources, read a lot of books, articles, etc.  Also take classes that are offered online or through your local community.  Never stop learning and if you can, find an online forum that you can network with to stay on top of current trends.

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