Real estate investment trusts, or REITs, are companies that own, operate, lease, or finance income-producing real estate. In general, REITs specialize in a specific kind of property – say, movie theaters, strip malls, health care facilities, storage units, resorts, or office properties.
Let’s take a look at some other key features of REITs and how they can affect your portfolio…
REITs operate a lot like a stocks—in fact, you’ll often hear people refer to them as “real estate stocks.” Most are publicly traded in the major exchanges, although there are also public non-listed and private REITs. However, unlike actual real estate property, they can be easily and quickly sold. And you don’t have to deal with pesky tenants!
Here at The Motley Fool, we believe that diversification is key to successful, long-term investing. As we’re guessing you already know, putting all of your eggs in one basket can be a risky investment strategy. Adding a few REITs to your portfolio provides diversification.
In order to qualify for REIT status, a corporation must distribute at least 90% of its funds from operations (FFO) in the form of dividends to unitholders (fancy REIT-speak for shareholders). In return, the corporation doesn’t have to pay U.S. federal income taxes.
As you can probably guess, this 90% requirement means that REITs can be pretty strong income vehicles for unitholders. However, keep in mind that the dividends are non-qualifying, so unitholders will pay income tax at the full rate. Nevertheless, REITs can be a good option for people who are looking for reliable dividend payouts and long-term capital appreciation.
— Answer provided by Motley Fool member Paul Thomas, CMFMutwa