3.2.5. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) differ from other real estate companies in that they are required to operate the properties they develop after they have built them, rather than selling them off. Most REITs specialize in a single type of real estate.
Investing in real estate can provide diversity to a portfolio and a nice rate of return if values appreciate over time. On the other hand, real estate can be an expensive investment. Liquidity can be limited due to unpredictable market conditions and lack of interested investors, especially for commercial or industrial real estate.
A Real Estate Investment Trust is a type of company that is modeled on a mutual fund. A REIT buys, develops, manages, and sells a portfolio of income-producing properties. Because a REIT is a trust, it sells shares of beneficial interest. The holder of these shares receives benefits from the assets held by the trust—in this case, real estate—but does not own the actual assets. By owning a REIT, investors can take part in real estate’s potential benefits, including price appreciation and income, without the added burden of owning and managing property.
REIT shareholders receive dividends from investment income (primarily rent). They also receive capital gains distributions when properties are sold. REITs do not pass thr