A short introduction to REITs
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REIT investing is all about the steady income.
Real estate investment trusts, or REITs, are companies that own, finance and manage income-producing properties, including apartments, office buildings, malls and warehouses. According to REITnet, more than 200 real estate investment trusts are publicly-traded on national stock markets.
For most individuals, REITs are the only way to invest in commercial and industrial real estate. From an investor's perspective, the biggest advantage of REITs is their cash flow, most of which goes directly to shareholders. Federal regulation requires real estate investment trusts to distribute 90 percent of their taxable income to shareholders, so they're popular investments for people who want cash dividends. That's also why many observers believe REITs are one of the best hedges against inflation.
And because real estate investment trust can deduct dividends from its tax bills, they don't suffer from the double taxation inflicted on shareholder payouts made by other public companies. However, those dividends are also an anchor on REIT growth; because the trusts distribute most of their profits, they usually have to raise more capital -- issue more shares, or take on debt -- to expand.
REITs grew in popularity after Congress passed the Tax Reform Act of 1986. That massive bill included provisions that changed tax shelter laws that previously encouraged property owners to record losses on real estate. Also, REITs were allowed to manage property rather than simply own it. As a result, between 1980 and 2000, the number of equity REITs more than quadrupled, according to the National Association of Real Estate Investment Trusts.
Many real estate investment trusts are sector-specific. In the first half of this year, industrial, hotel and regional mall REITs were among the leading gainers.
Real estate investment trusts have often flourished in bear stock markets -- including the latest one. From March 2000 to March 2003, the Morgan Stanley REIT Index rose 49 percent, while the S&P 500 dropped 39 percent. But the opposite is also true. Real estate trusts can stagnate during bull markets for stocks; already, the S&P 500 has outpaced the Morgan Stanley REIT Index for the past three months.
Whether REITs deserve their current values has been a subject of debate over the past year. Managers of REIT funds argue that investors are drawn to their industry's relatively stable cash flow, reliable dividends and deeper level of financial disclosure. Skeptics believe that the increase in the value of REITs largely stems from a lot of money going into a small niche.
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