If you own your home, then you have a stake in the real estate market. But the commercial real estate investment market moves in a different cycle than the housing market and can provide some benefits that home ownership doesn't. If you want a stake in the commercial real estate market, there is no easier way to invest than to buy shares of a real estate investment trust (REIT).
Real estate investment trusts (REITS) are like stocks for the commercial real estate industry. They are trusts that buy commercial properties, such as apartments, office buildings, and shopping centers that produce income. When you buy shares of a real estate investment trust, you become a part owner in all of the property holdings of the real estate investment trust.
Real estate investment trusts are traded like stocks on the major stock exchanges, so they provide the liquidity of stocks with the diversification and income of commercial real estate.
REITs were first approved by Congress in 1960 to offer small investors a chance to participate in the commercial real estate market. Although they were slow to catch on initially, they have become increasingly popular in recent years. There are now more than 200 REITs available on the major stock exchanges, including about 150 Real estate investment trusts on the New York Stock Exchange, and dozens more on the American Stock Exchange and NASDAQ market. You can buy them through any broker and follow them in the daily stock listings of many newspapers or the internet.
Real estate investment trusts have several attractive features. They pay among the highest yields of all types of investments, the dividends often increase from year to year, and they are easy to buy, sell, and follow.
There are several different types of Real estate investment trusts available on the market:
- Equity real estate investment trusts own and operate income-producing real estate, such as apartments, warehouses, office buildings, hotels, and shopping centers.
- Specialized REITs focus on a particular type of property, such as shopping centers or health care facilities.
- Geographically focused REITs specialize in a single region or metropolitan area, while others try to acquire properties throughout the country. Mortgage Real estate investment trusts lend money to real estate owners and operators and raise income from the interest payments on the mortgages.
- Hybrid real estate investment trusts own properties and provide loans to real estate owners.
Real estate investment trusts are closely regulated, and must meet certain requirements:
- Must be managed by a board of directors.
- Must pay shareholder dividends of at least 90 percent of its taxable income.
- Must invest at least 75 percent of total assets in real estate assets.
- Must derive 75 percent of gross income from rents from real property or interest on mortgages on real property.
- Must be managed by a board of directors.
- Must have a minimum of 100 shareholders.
- Must have no more than 50 percent of the shares held by five or fewer individuals.
