A real estate investment trust, or REIT, allows an individual to invest in a variety of real estate properties through a mutual fund without individually purchasing a property. The mutual fund purchases stock in a variety of REITs that have purchased property on behalf of the trust's shareholders. The REIT then either rents the properties out or sells the real estate to generate a potential profit for shareholders in the trust. Investing in REITs allows individuals to minimize the risk involved in real estate investments and to retain larger cash reserves, since only shares in a portfolio are purchased.
1. Determine the type of property in which you would like to purchase shares through a REIT. Choose a mutual fund that buys shares in REITs that invest in your preferred property type. An equity REIT owns and rents out commercial properties, while a mortgage REIT may issue mortgage loans to individuals and businesses and buy mortgages from third party lenders.
2. Consider your preferred type of property in a comparison with current real estate trends. For example, the rise in foreclosures due to the housing crisis led to an increase in apartment rentals, which made REITs focused on apartment buildings an attractive purchase for investors at that time.
3. Look for a REIT that consistently reviews property within the trust's portfolio and weeds out under-performing assets if you are looking for consistent income from your investments versus long-term growth. Since a REIT is legally obligated to pay out 90 percent of its yearly taxable income as dividends, investing in a well-managed trust can lead to consistent earnings.
4. Examine the one-year, three-year and five-year annualized growth rates for the REITs you may want to invest in and pick the fund or funds with a steady rate of growth.
5. Assess the company's funds from operations (FFO). This metric takes the REIT's net income and subtracts gains from sold real estate, depreciation and amortization. Steady or consistent growth in the FFO metric generally indicates a well-managed trust.
6. Pick a method of investing in the REIT. Storing a REIT in a tax-deferred retirement account such as 401(k) or individual retirement account may help to reduce the potential income tax burden attached to the dividend payments but will limit your access to the funds earned.
- REIT earnings are taxed at the dividend recipient's individual income tax rate when the REIT is not part of a tax-deferred retirement account.
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