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
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
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.