A real estate investment trust, REIT for short, is a security that directly invests in real estate and is sold like stock on major exchanges. The REIT’s investments are made through mortgages, properties, or both. Individuals can invest in a REIT by purchasing shares on an exchange or by making an investment in a mutual fund specializing in public real estate.
REITs are subject to special tax treatment and they are a very liquid way of making an investment in real estate. In addition, they are known for their high dividend yields, making them very attractive to dividend investors. Some REITs feature dividend reinvestment plans, or DRIPs, which permit investors to reinvest their dividend payments, compounding their returns.
Revenues in equity REITs come from the rents on the properties they own. Mortgage REITs loan real estate owners money for mortgages. Alternatively, they may purchase mortgage-backed securities or existing mortgages. Their revenues come from the interest earned on the mortgage loans. Hybrid REITS invest in both mortgages and properties.
REITs are required to distribute nearly all of their earnings to their shareholders. Most REITs feature stable revenues and thus are able to maintain and usually increase dividend distributions over the long-term. At the corporate level, a REIT is not taxed but the distributions from the earnings are usually taxed as regular income. The remainder of the REIT distribution is considered a return of capital, taxed as a capital gain when the investor sells shares.
Investors get instant diversification when they invest in REITs because many include hundreds of properties. Since all earnings are distributed, REIT yields are usually much higher than regular stock yields. Several REITs that are worthy of a further look are Realty Income Corporation, Health Care Property Investors, Inc., Universal Health Realty Income Trust, and National Retail Properties, Inc.
In the end, investing in the best REIT funds provides a way to build a passive income while also capitalizing on the cheap real estate market. This isn’t to say this is a good time to enter the market — that obviously requires a lot more research, planning, and a strong timing strategy that we can’t exactly get into in this article.
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