It's no secret that real estate is one of the most lucrative investment opportunities
available. After all, property is the one commodity that we're not making more
of. Nonetheless, some people aren't comfortable with the risks often involved
in buying, selling and renting out properties-and yet they still would like
to reap the rewards of a real estate investment. This is where a real estate
investment trust comes in.
What is a Real Estate Investment Trust?
A real estate investment trust, or REIT,
is an unincorporated association of investors who pool their resources to invest
in real estate projects and share the associated profits and losses. REITs are
managed by at least one trustee or board member who oversees decision-making
and manages the trust's assets and liabilities.
Because of the collaborative effort and shared responsibilities, REITs typically
invest in large-scale real estate projects, such as housing developments, shopping
malls and apartment buildings. However, there are three different types of real
estate investment trusts, each of which focuses on a different market sector:
Equity REITs, Mortgage REITs and Hybrid REITs.
In an Equity REIT, the associated trust invests in their own properties, by
owning and usually renting out properties. In this instance, the trust makes
money from managing its own real estate value, or equity.
In a Mortgage REIT, the trust invests in helping others
own or invest in property, by providing the funds for new or existing mortgages.
The trust's primary responsibility, in this instance, is to financially
back mortgages. Revenue is generated by the interest the trust earns on these
loans.
Lastly, the Hybrid REIT utilizes investment techniques from both the Mortgage
and the Equity REITs. The group invests in their own properties and
provides mortgage funding to others, thereby drawing profits from both investment
sources.
The Pros and Cons
Investors in REITs often gain the benefits of investing in real estate, without
the risk of trying it on one's own. In an REIT, individuals group together
to share profits and losses, gain dividends (or shares of any revenue, after
all expenses have been paid) and enjoy liquid financial investing-much
like the stock market. For this reason, REITs are a popular investment alternative
for low-risk investors looking to delve into the real estate market.
What many real estate investors don't like about REITs is the loss of
individual control. Sure, you might not have the headaches involved with managing
your own properties, but you also don't have any direct control over when
properties are purchased and sold, when improvements are or aren't made,
when rents should be raised to meet current market conditions, etc. The board
trustees from the REIT make those decisions collectively, usually without input
from secondary investors. It's true, however, that REITs can still be
desirable investment options, especially for the "hands off" sort
of real estate investor.
How to Invest in an REIT
Individuals interested in participating in an REIT might be wise to meet with
a real estate investment trust broker. Much like
a stock broker, these professionals will be able to walk you through the pros
and cons of each type of REIT, as well as help you diversify your accounts,
offer advice and manage your portfolio. Or, if you're a savvy investor,
REITs are also available for direct public purchase through open exchanges.
For more information, visit an online financial or real estate investment resource,
such as SmartMoney.com or MoneyCentral.MSN.com.
Answer Submitted on Wed, Jul 12 2006
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