Real Estate Investment Trusts (REITs) offer several investment benefits for the individual investor. REITs are corporations that own and manage real estate properties, buy and hold mortgage-backed securities, or loan money for mortgages. Investors can earn dividend income as well as capital gains.
The first important investment benefit of a REIT is diversification. Diversification helps an investor minimize risk and participate in a wider range of investment opportunities. Because REITs invest in a range of properties, they offer an investor a diversified portfolio of real estate properties all from within one REIT. The individual investor is able to take advantage of this and benefit from large scale real estate development projects and a portfolio that they would not be able to afford on their own.
Another important benefit from a REIT investment is the ability to earn steady dividend income. REITs are required by law to pay out a minimum of ninety percent of their taxable income in the form of dividends to shareholders. REITs therefore offer a consistent and stable stream of income for their investors.
REIT investments are provide a hedge against inflation. Dividend growth in REITs have historically exceeded the inflation rate. This helps the investor to minimize loss of purchasing power. This is especially important to retirees and others dependent on fixed incomes. REITs can be a very beneficial vehicle to help minimize the effects of inflation.
REIT investments, unlike direct real estate investments, are also very liquid investments. Many REITs are publicly traded on the major stock exchanges like the New York Stock Exchange. So unlike property which can be hard to sell, shares in a REIT can be bought and sold on the major exchanges.
Another important benefit of REIT investments is their potential to yield solid long term total returns. REITs often outperform other types of real estate and equity investments. REITs also offer the potential of solid risk-adjusted returns. Strong diversification and the potential for solid long term returns make a REIT a good fit for an efficient and well-balanced investment portfolio. Adding a REIT to one’s investment portfolio can help to improve the stability of the portfolio as well as help to maximize returns.
In addition there is the benefit of transparency. First, REITs offer tax transparency. The REIT does not pay corporate taxes but instead pays out dividends on a consistent basis. Taxes are paid by the individual shareholders on the distributions. REITs also offer operating transparency. Public REITs are registered by the Securities and Exchange Commission and subject to their regulation. They must comply with corporate governance, information disclosure and financial reporting standards issued by the Securities and Exchange Commission. REITs are also scrutinized by independent and Wall Street analysts.
REITs also offer the benefit passive income. Investors do not have to actively manage real estate properties. This is done by the REIT. Properties are primarily held as investments rather than as short term flips. The individual properties in a REIT are part of a diversified portfolio that is managed by the REIT’s board of directors.