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REITs
REIT
stands for Real Estate Investment Trust. As their name implies,
REITs make investments in some facet of the real estate industry.
In general terms, REITs are either equity REITs or mortgage
REITs. Equity REITs seek out, purchase, and hold interests
in actual pieces of real estate. Mortgage REITs act as a bank
or mortgage banker, lending out funds held by the trust to
other parties that are purchasing pieces of real property.
Mortgage REITs make their income from the spread between the
rate of interest charged the borrower and the cost of funds
loaned. Equity REITs make their income from renting out the
property they own, providing services to tenants, and any
appreciation from the sale of properties owned. Beyond
these two distinctions, the differences in REITs can be almost
endless.
REITs frequently have a specialty
or focus. These specialties may include the type of property
invested in, the anticipated liquidation date of the trust,
or a specific goal for the trust. A REIT may invest in, or
lend on, only apartment buildings, retail strip malls, motels,
theme parks, or mini storage units. Just as there are as many
different property categories there are REITs specializing
in them. The thought is if they go to the trouble to become
proficient in managing a movie complex or residential apartment
building they can use the lessons learned to better manage
additional properties of the same type. Other REITs may diversify
into a mix of properties to gain from seasonal or economic
differences. When patrons aren't at a summer filled theme
park they may be spending money at a winter frequented ski
area. If retail space rentals are down in a weak economy then
more people are renting apartments. REITs may be an ongoing
venture or have a target date when they hope to liquidate
their properties. An investor with a child going to college
in 11 years might invest in a REIT hoping to liquidate their
holdings in 8-10 years. Most REITs pay some sort of dividend
that is usually higher than the rate received on CDs or bonds.
The rate is higher because there is slightly more risk
in a REIT investment than there is in a CD or good quality
debt instrument. The good news for the average investor
is this high dividend tends to buoy the price of REITs in
ugly markets because shares in the REIT will be quickly purchased
as an even slightly lower price increases the yield of the
dividend. This holds true as long as the REIT isn't experiencing
individual problems or doesn't have a large exposure in a
market that is particularly weak. A REIT that owns exclusively
apartment buildings may not be attractive if new rent control
is enacted. Neither will a REIT that owns only movie complexes
if a youth curfew is put in place. The price of REIT shares
can move up quickly with developments in interest rates or
a move to more defensive investments.
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