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Your 101 Guide To REITs

What exactly is there to know about REITs? This section provides the basic information you need to help understand REITs better.

What are REITs?

REITs

Real estate investment trusts, or REITs, are companies that own and operate income-producing real estate properties. Modeled after mutual funds, REITs allow you to invest and earn income through real estate properties without having to purchase property.

Today, REITs are found in every state and closely tied to the economy—apartments, hotels, fast food chains, shopping malls, offices, and more.

A brief history of REITs

Before REITs, individuals needed a lot of money to invest in real estate, especially commercial properties. Only investors with a significant amount of capital could invest in real estate, making it inaccessible to others. This all changed in 1960 when President Dwight Eisenhower signed a law creating REITs to democratize real estate investment. Through REITs, investors could now share the gains or losses of a trust by purchasing a share of a REIT.

Let’s look at an example

Still confused as to how REITs work? Here’s an example:

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A REIT company owns many transshipment warehouses that are leased to Amazon, BMW or Federal Express.

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The REIT owns the land and buildings that are occupied by these major U.S. and international companies. The REIT manages the property portfolio and the shareholders invest and receive shares that represent their ownership interests in the REIT that owns the propertied.

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The companies that are tenants pay rent to the REIT that is their landlord. This rent is then income to the REIT and their shareholders. 90% of the net income of the REIT is then paid out to the shareholders (You!) of the REIT as dividend income.

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The REIT will then invest in more properties that are occupied by these great tenants, collect more rent and pay their shareholders more dividend income to their shareholders!

Why invest in REITs?

Good income and potential long-term growth

REITs can provide a good source of dividend income, competitive returns and potential asset appreciation.

High dividend yield

REITs can often produce higher yields than many common stocks or fixed income investments.

Regular Dividend Income

REITs are required to pay 90% of their income to shareholders (You!). This provides a good basis for steady dividend income.

Transparency

REITs are required to release quarterly and yearly financial reports.

Performance

From 1975 through 2014 REITs have had an annual return of 14.1% while the S&P 500 returned 12.2%, according to Paul Merriman’s 10 Things You Need to Know About REITs (1-28-15).

Diversification

REITs can be a good part of a diverse investment portfolio for the long term.

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