Real Estate Investment Trusts

1. Equity REITs:  By far the most common (96.1% of all REITs are of this variety), equity REITs own real property (including residential, commercial, and industrial real properties) and produce income from rents.

2. Mortgage REITs:  Only 1.6% of all REITs are of this variety, which lend money to real estate owners and operators and/or acquire existing mortgages and mortgage-backed securities.

3. Hybrid REITs:  2.3% of all REITs are hybrids, which own real property (as equity REITs do) and mortgages (as mortgage REITs do).

REITs have a number of benefits:

1. Performance.  According to the NAREIT, REITs — with compound annual returns of 13.80% between December, 1975 and December, 2005 — outperformed the S&P 500 (12.70% compound annual returns), the Dow Jones Industrial Index (8.80% compound annual returns), and the Nasdaq composite (10.90% compound annual returns).

2. Dividends.  To be considered for pass-through taxation (passing profits to investors without taxation) a REIT must pay at least 90% of its taxable income as dividends to shareholders each year, more than most investments pay.

3. Diversification.  Real estate can be an effective way to diversify your investment portfolio.  In contrast to investing directly in real estate that you have to manage yourself, REITs allow you the benefit of real estate investments without the hassles (and potential losses) associated with directly owning real estate yourself.

REITs - Real Estate Investment Trusts