Investing 101: Updated and Expanded

Chapter 10. REAL ESTATE INVESTMENT TRUSTS

In the investment world, real estate investment trusts (REITs) are a relative newcomer. Established as a way of allowing individual investors to buy into commercial real estate, REITs have become popular in recent years because they bridge the gap between stocks and bonds, exhibiting qualities of both.

WHAT REITs ARE

REITs are companies that invest in commercial real estate, from shopping centers and office buildings to apartment complexes and hotels. Like other companies, they issue stock through initial public offerings, or IPOs, after which the stock is traded on major stock exchanges and sold through brokers. The market price of the stock generally reflects the underlying value of the real estate the company owns and the income it produces from that real estate, as well as market perceptions of the company's management and prospects. As a result, REIT shares can sell for a premium or a discount to the company's net asset value—just like the shares of any other publicly traded company.

Over the past thirty-five years, the average annual returns for REITs have been similar to those of big-company stocks. REIT returns have averaged 10.75 percent over this time, according to the National Association of Real Estate Investment Trusts. Big-company stocks have returned roughly 10.4 percent over the eighty-one-year period tracked by Ibbotson Associates of Chicago.

Income

REITs also resemble bonds in that they throw off a relatively steady stream of ...