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September 25, 2013

If you don't know the first thing about Real Estate Investment Trust (REIT), it is a type of investment instrument that allows you to invest in real estate property in a manner that is as fluid as investing in the stock market.

How does it work?

A real estate company raises money on an exchange through an Initial Public Offering (IPO). The money raised is then used to develop and manage, or else buy and sell, real estate properties like apartments, hotels, warehouses, shopping malls and office buildings. There are trusts that focus only on one area of investment. Some focus only on one type of property like hotels while others focus on real estate in one area, state or even country.
Editor's Note: Learn how to open a self-directed IRA that can have both REIT's and precious metals in it

Qualification Requirements

To qualify as a real estate investment trust, a real estate company must pay 90% of its taxable profit to its investors. In exchange, they do not pay corporate income tax. Regular companies pay taxes and then decide what to do with the rest of the money. An REIT simply pays out majority of its profits to avoid taxes.

While you don't get to own a property when you invest in REIT, they do pay dividends. Unlike stock investing, your income potential is dependent on rent and the appreciation of the value of the properties included in the trust.

Ownership of Multiple Properties

Also, a real estate trust company rarely invests in only one property, so if there's a problem with one asset, you can still gain from other properties in the trust. In that sense, an REIT is safer than a stock. When you invest in REIT, you own real estate property without the associated costs of acquisition, and the headache of actually managing property and making it profitable.

As we said before, REITs are required by law to distribute 90% of their income to their shareholders. In company stock investments, the board of directors are the only ones who decide whether a company has excess cash to distribute to its stockholders.

If you want to invest REITs, you should do your homework.

There are three factors you need to consider:

  1. the track record of the REIT managers
  2. the diversity of the properties included in the REIT
  3. funds from operations (FFO) and distributable cash.

Obviously, a real estate trust is really only as good as its managers. Also, if a trust is focused on commercial buildings and the market experiences a drop in occupancy rates, it will affect your income. FFO is really nothing more than cash flow generated from operations.

Before you invest, read the prospectus and analyze it for the factors we mentioned above.

It's been said that real estate is one of the safest and most profitable invest vehicles in the market. However, not everyone has the money, the appetite or the experience to buy and flip property. And even when you have real estate property, you need to manage it towards profitability.

A real estate investment trust, however, gives you the opportunity to profit from real estate without the associated headaches.

P.S. If you want to hedge against INFLATION and the current problem with U.S. debt, then it is critical to own precious metals in your retirement account. See how this can be done by Clicking on this link.

About the author 


Tom is a former accountant turned entrepreneur. He is not a financial adviser but does tend to give a lot of financial advice to his friends and colleagues. He currently runs a small online venture and blogs about his research and experiences.

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