Introduction
A Real Estate Investment Trusts (REIT) is a type of security that has been traded like stocks on all major exchanges foreign and domestic for over fifty years now. REITs were created by an act of congress in 1960 to enable small and large investors to benefit from the rental income of commercial properties. A REIT is an investment “company that purchases, develops, manages and sells real estate assets.” They are similar to mutual funds in that the average investor does not have the funds to purchase numerous real estate properties or developments, like most average investors do not have the funds to purchase numerous stocks and bonds. Therefore to invest limited capital into a well diversified fund a REIT is purchased like a mutual fund which gives the investor a stake in a diversified fund, which as Harry Markowitz proved in the 50’s with his Modern Portfolio Theory, diversification lowers portfolio risk without sacrificing return. REITs also provide a reliable dividend income.
A REIT generally falls into one of three categories:
I. “Equity REITs are by far the most common REIT and invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.
II. Mortgage REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.
III. Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages.”
REITs offer a highly liquid way to invest in real estate ...