Should I Invest in Real Estate Investment Trusts?

Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about real estate investment trusts, more commonly known as “REITs.” Should these investments be a part of your portfolio?

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

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For more information, check out “Ask Stacy: Which Is a Better Investment — Stocks or Real Estate?” and “The 10 Best Cities to Invest in Real Estate Now.” You can also go to the search at the top of this page, put in the words “real estate investing” and find plenty of information on just about everything relating to this topic.

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Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Gary:

Stacy, are REITs a good, safe investment?

Let’s do three things: Let’s define what a REIT is, discuss some of the advantages, and then look at some of the disadvantages.

What’s a REIT?

REIT stands for “real estate investment trust.”

A REIT is simply a publicly traded company that owns, manages or finances real estate. They have a special tax status that requires them to pay out at least 90 percent of their income to their shareholders as dividends.

A REIT can invest in any kind of real estate: residential or commercial. Some REITs invest in malls, others invest in apartments and others invest in office buildings. You know going in the type of real estate they invest in.

REIT pluses

The income from a REIT comes from collecting rents, as well as selling properties. Because they pay out nearly all their income, REITs often feature high dividends for shareholders. You can earn 5, 6, 7, even 8 percent or more on some real estate investment trusts.

This makes them good investments for investors looking for income — retired people, for example.

Are they safe? Well, that depends on how good they are at what they do. They may use a lot of leverage, meaning borrowed money, like you do when you buy a house with a mortgage. Lots of leverage is great when real estate prices are rising, but a downturn can hurt values, or even bankrupt a real estate company. Generally speaking, though, real estate is a relatively stable investment.

Before investing, check a REIT’s track record, see what they’re buying and how they’ve treated their investors in the past.

Another advantage of REITs: They’re easy to buy and sell. It’s much easier to invest in the stock of a company that buys real estate than finding, financing, fixing up and managing real estate on your own.

REIT minuses

Real estate investment trusts make tax time a bit more complicated. As they pay dividends, some of that money can be classified as return of capital, which complicates your income tax reporting.

Also, there are advantages to buying your own real estate. If you’re good at it, you can conceivably make more money than you can with a real estate investment trust.

Bottom line: Should you invest in REITs? Sure, for a portion of your portfolio, especially if you like income and believe real estate is a solid investment. So, Gary, if you’re willing to properly research REITs, go for it.

Meet me right here next time!

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About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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