Real Estate Investment Trusts 101

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What is a Real Estate Investment Trust?


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It’s no secret that real estate is one of the most lucrative investment opportunities available. After all, property is the one commodity that we’re not making more of. Nonetheless, some people aren’t comfortable with the risks often involved in buying, selling and renting out properties-and yet they still would like to reap the rewards of a real estate investment. This is where a real estate investment trust comes in.

What is a Real Estate Investment Trust?

A real estate investment trust, or REIT, is an unincorporated association of investors who pool their resources to invest in real estate projects and share the associated profits and losses. REITs are managed by at least one trustee or board member who oversees decision-making and manages the trust’s assets and liabilities.

Because of the collaborative effort and shared responsibilities, REITs typically invest in large-scale real estate projects, such as housing developments, shopping malls and apartment buildings. However, there are three different types of real estate investment trusts, each of which focuses on a different market sector: Equity REITs, Mortgage REITs and Hybrid REITs.

In an Equity REIT, the associated trust invests in their own properties, by owning and usually renting out properties. In this instance, the trust makes money from managing its own real estate value, or equity.

In a Mortgage REIT, the trust invests in helping others own or invest in property, by providing the funds for new or existing mortgages. The trust’s primary responsibility, in this instance, is to financially back mortgages. Revenue is generated by the interest the trust earns on these loans.

Lastly, the Hybrid REIT utilizes investment techniques from both the Mortgage and the Equity REITs. The group invests in their own properties and provides mortgage funding to others, thereby drawing profits from both investment sources.

The Pros and Cons

Investors in REITs often gain the benefits of investing in real estate, without the risk of trying it on one’s own. In an REIT, individuals group together to share profits and losses, gain dividends (or shares of any revenue, after all expenses have been paid) and enjoy liquid financial investing-much like the stock market. For this reason, REITs are a popular investment alternative for low-risk investors looking to delve into the real estate market.

What many real estate investors don’t like about REITs is the loss of individual control. Sure, you might not have the headaches involved with managing your own properties, but you also don’t have any direct control over when properties are purchased and sold, when improvements are or aren’t made, when rents should be raised to meet current market conditions, etc. The board trustees from the REIT make those decisions collectively, usually without input from secondary investors. It’s true, however, that REITs can still be desirable investment options, especially for the “hands off” sort of real estate investor.

How to Invest in an REIT

Individuals interested in participating in an REIT might be wise to meet with a real estate investment trust broker. Much like a stock broker, these professionals will be able to walk you through the pros and cons of each type of REIT, as well as help you diversify your accounts, offer advice and manage your portfolio. Or, if you’re a savvy investor, REITs are also available for direct public purchase through open exchanges. For more information, visit an online financial or real estate investment resource, such as SmartMoney.com or MoneyCentral.MSN.com.

Answered over 8 years ago
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