What is a REIT? That is a very common question. You see, REIT is an acronym for an investment that all dividend-focused investors eventually become familiar with. That’s because a REIT is a dividend paying investment with a legal requirement to distribute the majority of the income it earns to its shareholders.
REIT stands for Real Estate Investment Trust. REIT’s are securities that trade on the stock exchange like a stock. And REITs do invest in real estate, both commercial and residential property, and can also invest in mortgages and mortgage backed securities. Most REITs generates their revenue primarily through the rents they collect on the property they own.
But in order to qualify as a REIT, which in turn provides the company with special tax treatment, the company must distribute at least 90% of its taxable income to its shareholders. As such, REITs are outstanding investments for investors seeking dividend income.
Types of REITs
Now that we know what a REIT is, it’s important to understand the different kinds of REITs. The difference among them mainly being what they invest in. There are “equity” REITs. These REITs own property directly and make money by collecting rents. There are “mortgage” REITs. These invest in real estate by providing funding for mortgages and by purchasing mortgages and mortgage-backed securities directly. And there is a type of REIT that does both and is often referred to as a “hybrid” REIT.
By the way, it is very important for you to know what kind of REIT you are investing in, and what types of properties and mortgages your REIT’s own. That’s because when investing in REITs, as with all investing, it is important to be diversified.
And REITs can be very specific as to the type of property (apartment buildings as opposed to office buildings) and the regions (New York City versus Arkansas) as well as the types of mortgages they invest in. You don’t want to accidentally become concentrated in any individual region, property type or mortgage category.
One very convenient way to invest in REITs, and a way to avoid becoming undiversified, is through REIT mutual funds and ETFs (exchange traded funds). REIT mutual funds and ETFs provide easy access to diversified portfolios of REITs that can save you a lot of time and effort that properly researching REITs often demands. But whether you choose an individual REIT, a REIT mutual fund or REIT ETF, REITs are a valuable, convenient way to invest in and earn income from real estate.
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