CHAPTER 1REITs: What They Are and How They Work
“The true investor … will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.”
—Benjamin Graham
What's your idea of a perfect investment?
That's a trick question, for the record, since there is no such thing. Greater returns come with greater risk, while lesser risk comes with lower returns. You're just not going to find a stock that offers intense gains and intense safety at the same time.
Even so, those looking for above‐average current returns, reasonably strong long‐term price appreciation, and only modest risk should definitely consider commercial real estate that can generate reliable streams of rental income.
In the past, real estate investing was only available to wealthy entrepreneurs with deep pockets and the ability to acquire and actively manage portfolios of properties. Real estate investment trusts, or REITs (pronounced “reets”), were born out of that environment with the intent to allow small investors the same kinds of benefits.
Congress officially recognized REITs in 1960, patterning them after mutual fund laws. In the beginning, they were severely restricted, mostly meant to just provide investors with a non‐taxed, passive flow‐through form of income. The REIT vehicle received a dividend‐paid deduction from corporate tax for every dollar distributed. And income was taxed only at the shareholder level instead of being double‐taxed ...
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