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REIT Funds: A Good Real Estate Investment Option?


A Real Estate Investment Trust (REIT) Funds is defined as a security that is sold, like a stock, on the major exchanges. REITs invest directly in real estate, and are a great way for smaller investors to get involved in large-scale real estate investment.

Individuals can invest in REITs in two ways. They can either invest in a mutual fund that specializes in real estate, or they may purchase REIT shares directly on the open exchange.

Some REIT securities specialize in certain areas of real estate. Others invest only in real estate that is located in a certain part of the country. Among other things, REITs invest in apartments, warehouses, malls, office buildings, and hotels.

There are three main types of REITs: Equity, mortgage, and hybrid. Equity REITs own properties and collect revenue primarily from rent. Mortgage REITs invest in mortgages by loaning money to those who are purchasing buildings; and Hybrid REITs do a combination of both.

Advantages of REIT Funds

The main reason people are interested in investing their money into REITs is to create a tax break. REITs are required to pay a very small amount of federal income tax, and sometimes pay none at all. They are subject to a few restrictions from the IRS, but the restrictions are on the side of the shareholders. For example, REITs are required to distribute at least 90% of their annual income to shareholders as dividends. This results in a typical dividend yield of at least 6% for investors.

REITs are known to provide a certain amount of much-needed diversity to the average portfolio. The standard shifts of the market do not affect REITs as much as they do other types of investments, which means that no matter how your other investments are behaving your REIT will most likely be in a class of its own. This can help boost your overall returns, particularly when the market is performing poorly. It can also save your entire portfolio from taking a major dive when things aren't going so well.

The other major advantage of REITs is the fact that they offer a solid, tangible investment. Real estate is in high demand in today's market, and many investors like the idea of placing their money in something that has existed for a long time and will continue to do so. The average lease on a building is at least a year long, and often longer for corporate buildings or shopping malls. Investing in a REIT, then, provides you with a certain amount of stability.

Disadvantages of REIT Funds

The main disadvantage of REITs is the flip side of their 90% dividend return. Because that 90% must be distributed to holders each year, that leaves only 10% of annual profits to invest back into business lines. This means that for the most part, REITs grow more slowly than the average stock. If you're looking for something that grows extremely quickly, REITs are probably not the best choice for you.

Because REITs already have such an advantage when it comes to taxes, they are not qualified to enjoy the lower tax rate recently implemented by Congress. This new 15% rate, which was set in place in 2003, does not apply to dividends paid out by your REIT each year. They will consequently be taxed at a higher rate than your other dividends.

Finally, although they're considered more stable than many other types of investments, REITs are not set in stone. Changes happen, and if the stock market is taking a major downward turn your REIT will most likely be affected. Keep in mind, too, that the real estate market experiences changes as rentals and purchases go through supply and demand. These things can all affect the rate of return on REITs.

REIT Funds in USA

The United States REIT model is considered a prime example of success and is used in many other countries to demonstrate how it can effectively work. The US model is based primarily on the idea of multiple shareholders contributing, as well as receiving 90% dividends each year.

One major rule of USA REITs is that they must be invested in by at least one hundred separate shareholders, with no five or less holding more than 50% of the shares. This ensures that the fund is widely held and is not controlled by any certain entity. USA REITs are generally managed by at least one main trustee or director. Larger funds may have multiple directors handling different areas of the investments.


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