The Basics of REIT Investing

January 22, 2013

A Backgrounder Provided by the Office of Gary Pagar

A real estate investment trust, or REIT, aims to return a profit through creating investments in real property or mortgages and selling shares in these investments on leading stock exchanges. A highly liquid form of investment, REITs can produce high yields and with a lesser risk than some forms of direct real estate investment. REITs additionally, enjoy a set of special tax regulations, and many offer dividend reinvestment plans, or DRIPs. A REIT may invest in shopping malls, office space, hotels, or housing units. 

REITs come in several varieties. A mortgage-based REIT owns and invests in mortgages on real property. Mortgage REITs lend funds to the owners of the real property or buy up existing mortgages in order to draw a profit from the interest paid. An equity REIT derives its profits mainly from rents paid on the real properties it owns. Hybrid REITs feature both kinds of investment.

Many REITs offer investment diversity through their focus on one or more geographic regions and types of real property. Investment professionals frequently recommend REITs to their clients because of their diversity, transparency, liquidity, and overall prospects for significant returns. 

Some have noted that allocation of from five to fifteen percent of a stock-and-bond portfolio to REITs boosted the risk-adjusted return of that portfolio in each decade-long rolling cycle since the early 1990s.

To become an investor in a REIT, a consumer may purchase shares directly or through a real estate-targeted mutual fund. Because any investment decision involves an amount of risk, individuals interested in REITs or any other financial instrument should consult a qualified professional.

Gary Pagar has used his experience in a variety of senior investment banking positions to assist clients interested in investing in real estate, consumer products, and other market sectors.

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