Analyze Real Estate Investment Trusts
Want a stake in real estate without the headaches of hands-on property management? Invest in real estate investment trusts (REITs).
For a portfolio stuffed with stocks and bonds, real estate investment trusts (REITs) are a nearly perfect diversification tool. REITs invest in different types of real estate, in which the earnings of the REIT often have more to do with rental and occupancy rates than the interest rates that affect stocks and bonds. Financial planners recommend investing up to 10 percent of your portfolio in REITs as part of a disciplined asset allocation strategy [Hack #74] . By buying shares in a REIT, you can invest in real estate without forking over a bundle of cash—and without the low liquidity because of the time it takes to sell real estate that you own directly. Although analyzing REITs requires a few more financial measures, you can easily expand your studies to include REITs in your portfolio.
What Is a REIT?
Originally created in 1960 by an act of Congress, REITs enable individual investors to easily participate in the commercial real estate market. In structure, REITs are pooled asset vehicles similar to mutual funds, but they invest in properties rather than stocks and bonds. REITs are required by tax law to distribute 90 percent of their taxable income to shareholders. Although the generous dividends that result are a boon for dividend-hungry investors, REITs also offer the potential for stock price appreciation.
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