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A Real Estate Investment Trust or REIT is a tax designation for a corporation to invest in real estate and either reduce or eliminate corporate income taxes while offering investors high yelds of return, as well as liquid methods of investing in real estate. REITs are required to distribute 90 percent of their income, which may be taxable to their investors. REITs that distribute all of their income generally pay no corporate tax. REITs were structured for real estate investments to be similar to mutual funds for stock investments.
REITs can be publicly or privately held. Public REITs can be listed on public stock exchanges like shares of common stock. REITs can be classified as equity, mortgage, or hybrid investments. Equity REITs, which are the most common type of REIT, invest in or own real estate and make money for investors by collecting rents from the real estate. Mortgage REITs lend money to owners and developers, or they invest in financial instruments secured by mortgages on real estate. Hybrid REITs are a combination of equity and mortgage REITs.
Since real estate offers investors diversification, investors have different options to consider. You can own real estate directly or invest in REITs. If you are going to invest in real estate ownership directly, keep in mind sometimes values go down. However, most real estate appreciates in value if you keep it long enough. Another thing to keep in mind about owning real estate is that real estate taxes eat into your profits. Also, as a real estate owner you constantly have to worry about physically maintaining the property or hiring someone else to do it. REITs give investors the advantage of purchasing shares of a real estate investment trust or investing in a mutual fund that specializes in public real estate, which means the investor does not own the real estate directly and avoids the worries, hassles, and costs of a property owner.
The types of real estate that REITs invest include shopping centers, office buildings, apartments, warehouses, and hotels. For instance, many REITs invest specifically in one area of real estate like shopping malls. Other REITs may only invest in a specific region, state, or country. Investing in REITs is a way of receiving liquid dividends by participating in the real estate market. Many large financial institutions, insurance companies and banks have formed real estate investment trusts as well. And their stocks are traded on the security exchanges Generally, REITs are considered more desirable investments than Limited Partnerships.
As you can tell, REITs offer clear advantages to investors and should be a part of any successful investment portfolio.
Source: http://en.wikipedia.org/wiki/Real_estate_investment_trus
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