Real Estate Investment Trust  - A Comprehensive Guide

A Real Estate Investment Trust or REIT owns different kinds of income-producing real estate related assets like office buildings, shopping centers, industrial spaces, apartments and hotels. 

In order to qualify as a Real Estate Investment Trust the company has to:  

• Distribute 90% of its taxable income among investors
• Secure 75% of its income from the mortgage interest of its properties or rent and
• Should invest at least 75% of its total assets in real estate

You can understand the investment structure of Real Estate Investment Trust better if you compare it with that of mutual funds in relation to stocks.

Real Estate Investment Trusts are of three categories.

An equity REIT invests in the investor’s own real estate and collects the rental amount.  

A mortgage Real Estate Investment Trust lends funds to developers and investors to invest in financial instruments backed by mortgages on real estate.

The hybrid Real Estate Investment Trust is a combination of the equity and mortgagee types. If a company wants to become a Real Estate Investment Trust, it must fulfill the requirements stated by the Internal Revenue Code. 

REIT is just like other corporations as it can be held privately or publicly. You can find public Real Estate Investment Trusts on public stock exchanges.

When you are looking for the key statistics of a Real Estate Investment Trust, check out its Net Asset Value (NAV), Adjusted Funds From Operations (AFFO) and Cash Available for Distribution (CAD). A REITaffected by a slowing economy or the global financial crisis can have share values reduced by 40-70%.  

The advantages and disadvantages of Real Estate Investment Trusts

If you are considering investing in a Real Estate Investment Trust, you can expect to get a steady stream of income. However, I will advise you not to let your REIT percentage as part of your fixed-income portfolio cross the limit of 25% since investing in Real Estate Investment Trusts has both its advantages and disadvantages.

Advantages: 

• As an investor, you can get a substantial income generated from rents through a REIT, its value increasing with the rise of real estate value
• Real Estate Investment Trusts can provide you access to different large commercial real estate projects that you can not reach otherwise
• Because Real Estate Investment Trusts sign the tenants of land and buildings to long-term lease contracts, you can find them to be one of the most stable industries
• A Real Estate Investment Trust can smoothen your overall returns and diversify your portfolio even during a market slow down

Disadvantages: 

• Because a REIT focuses on one particular sector of real estate, you face the risk of large financial damages if this sector falls
• If you invest in a Real Estate Investment Trust that concentrates on a location marked by large construction activities, you could face a downturn in its performance

Prime concerns for investing in a Real Estate InvestmentTrust 

I would suggest that when you invest in Real Estate Investment Trusts ensure that they concentrate in different locations and real estate sectors. Having diversified holdings is the proper way to enjoy economic stability through potential falls in a specific area or sector.

Before choosing a REIT, you should go an extra mile to check the track records of the company, with particular attention to its management teams, valuations and growth aspects. Also, pay attention to the current dividend yields of a Real Estate Investment Trust that should ideally be +6%.   

Praveen Kumar

Real Estate Investment Guide

http://www.real-estate-investment.net 

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