Real estate investments offer diversification

Personal Finance. By Katherine Vogt, AMNews staff. Nov. 10, 2003.

You don't have to own all the hotels on Park Place or Boardwalk to be a major real estate player.

Even armchair investors are getting a piece of lucrative real estate holdings such as shopping malls and hospitals through an increasingly popular investment vehicle known as a REIT.

Experts say interest in REITs, or real estate investment trusts, has surged in the last several years as investors look to branch out into new arenas. Touted as a means for small investors to access big real estate, REITs can help diversify a portfolio. But like any investment, financial experts say the strategy isn't right for everyone and should be weighed carefully before any money is put down.

REITs are companies that typically own income-producing real estate such as apartment complexes and commercial properties. They make money primarily by leasing the properties and collecting rent. There are also REITs that engage in the financing of commercial and residential real estate, but they are less common.

Shares of REITs are sold to investors and are often traded on major stock exchanges. A REIT can avoid paying corporate income tax by paying out all of its taxable income to shareholders through dividends. And to qualify as a REIT, a company must pay its shareholders at least 90% of its taxable income. Shareholders pay taxes on dividends and any capital gains.

REITs were created by Congress in the 1960s, but it wasn't until the 1990s that many of them became publicly traded companies, and their popularity subsequently grew, said Jay Hyde, a spokesman for the National Assn. of Real Estate Investment Trusts. The organization estimates that there are about 175 publicly traded REITs in the United States and possibly another hundred or more that are private or not tracked.