What are REITs? Best REITs for investing in Real Estate
Most people invest in real estate by buying a house. Some people even buy a second home or a vacation home to increase their real estate investments. What is the best way to invest in real estate beside this? Unless you are a residential or commercial real estate developer, then REITs (what is a REIT? Real Estate Investment Trust) are the next best thing. A Real Estate Investment Trust is a real estate company that offers shares to the public. Instead of running a company, the REIT owns real estate and earns revenue from rents on those properties.
REITs can be invested in a variety of properties. Some specialize in health care properties, such as assisted living or skilled nursing homes. Some invest in malls and retail properties. Some specialize in hotel properties or apartment buildings. Some hold properties across a number of classes. Because of the special tax laws that govern REITs, they are required to pay out the majority of their earnings each year as dividends to their share holders. By paying out 90% or more of their earnings, they pay no corporate income tax (much as an S Corp passes its earnings on directly to its owners, avoiding corporate taxation). So while the share price can appreciate, REITs are often held as income and dividend bearing securities, and their value often rises as interest rates fall (as an alternative to investing in low yielding bonds) and fall as interest rates rise (as people flock back to interest bearing bonds).
Types of REITs - Selecting the best REITs
The most common type of REITs are equity REITs. They own real properties and are not involved in mortgages. Over the last 20 years, REITs have returned about 8% a year. In the last few years, REITs have appreciated significantly during the recent real estate boom (bubble?), returning 25-40% per year, easily smashing the returns of the broader market. Why invest in REITs? The nice things about investing in REITs is that you can invest in real estate without tying up huge sums of money, as you would if you bought a commercial or rental property yourself. With a REIT, you can easily add to or decrease your holdings in real estate at any time, without the complex fees and transactions associated with the normal buying and selling or real estate (homes, rental properties, condos, commercial properties, etc.). One tax disadvantage of REITs is that REIT dividends DO NOT qualify for the 15% dividend tax rate. For books about investing in real estate REITs, check out R. Block's "Investing in REITs".
List of REITs Real Estate Investments
REITS have been top performers recently. Here are some of the leaders for results in 2004.
Morgan Stanley Inst. Euro Real Estate A - 47% (MSUAX)
ProFunds Ultra Real Estate Inv - 43% (REPIX)
Cohen & Steers Realty Focus I - 41% (CSSPX)
PIMCO:RealEstateRealReturn Strategy - 41% (PRRSX)
Alpine U.S. Real Estate Equity Y - 39% (EUEYX)
Cohen & Steers Realty Shares Instl - 39% (CSRIX)
- and more, at least 40 other REITs returned over 30% in 2004
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