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Real Estate Investment Trusts (REIT)

REIT

REITs were designed for the small investor who would like to invest in real estate but cannot afford the high costs of direct investment. A REIT pools the
money raised from shareholders to invest in a diversified portfolio of real estate assets, much the way a mutual fund pools a shareholder's money to invest in stocks. Shares of beneficial interest in trusts are traded like stocks and most are listed on the major stock exchanges or trade over the counter.  Many investors had big losses in REIT investments in the early and mid 1970s.  Overbuilding, rising interest rates, and poor management caused a collapse in the real estate market at that time. Borrowers defaulted on their loans forcing the highly leveraged REITs to foreclose on properties that were impossible to sell.  Many REITs went bankrupt, merged, or went out of business. The prudently managed trusts that have survived are solid organizations today, and investing in REITs  is a viable option.

For $2,000 or $3,000, the price of 100 shares of an REIT stock, an investor can become part owner or financier of some prime commercial, industrial, or residential real estate. By law, these trusts are required to pass along to their shareholders at least 95% of each year's operating profits in the form of dividends, which results in relatively high yields to the investor, REIT investments also hold out the prospect of capital appreciation. There are three types of REIT trusts. Equity trusts buy income producing property, mortgage REITs lend money to developers, and hybrid REITs own property and also make loans. One of the most important features of an REIT is that it is a liquid form of investment in a traditionally illiquid asset. Investing in real estate directly or in a limited partnership usually means that the investor's capital will be tied up for many years. The REIT investor is also not faced with the large front end load and management fees associated with limited partnership investments.

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