Real Estate Investment Trust (REIT)

A real estate investment trust, otherwise known as REIT, is a real estate company that offers common shares to the public. A REIT stock is very similar to any other stock that ownership in a business is represented. A REIT is different, however, because it has two unique features. Its primary business is managing groups of income-producing properties and it must then distribute most of its profits into dividends (distribution of a portion of a company's earnings).

In simpler terms a REIT is a trust company that accumulates a pool of money through an initial public offering (IPO). The money that has been accumulated is then used to buy, develop, manage and sell assets in real estate. The IPO that is used for generating a REIT is identical in its rules regarding prospectuses (a formal legal document describing details of a corporation), reporting requirements and regulations. However, the major difference here is that instead of purchasing stock in a single company, the owner of a REIT unit is actually buying a portion of a managed pool of real estate. This is clearly a clever idea. The pool of real estate then generates income through renting, leasing and selling of property and distributes it to the REIT holder on a regular basis.

So what are the advantages to purchasing a unit of REIT? There are a few indeed. When buying a share of a REIT, you in essence are buying a physical asset that generally has a long expected life span. It also has the prospective for income through rent and property appreciation. This compared to a common stock where the investor is buying the right to participate in the prosperity of the company through ownership. When participating in REIT, you are essentially taking a real stake in the ownership of the property. This has created a safe net, so to say, for the investor so they will always have the rights to the property underlying the trust while also enjoying the benefits of their income.

Another advantage to the REIT is mostly relative to the average investor. With REIT you have the ability to invest in real estate without the normally associated large capital and labor requirements. Once there are more and more investors going into the pool a greater amount of diversification is generated as the trust companies are able to buy more numerous properties which also reduce the negative effects that come along with having stock in a single asset.

One more advantage, usually considered the most important, of having stock in REIT’s is that it provides the requirement to distribute nearly 90% of their yearly taxable income (created by income producing real estate) to their shareholders. This high rate of distribution means that the holder of a REIT is greatly participating in the profitability of management and property within the trust. This is unlike a common stock ownership where the corporation decides whether or not excess cash is distributed to the shareholder.

An REIT is an extremely good investment, in my opinion, to become involved in. Instead of having the usual risks of owning stock in a single asset, this provides you with more options. You, along with fellow investors, are sharing the ownership and the risk involved.

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