Saturday, October 20, 2007

REITs - Alternative to direct real estate investing

Investing in real estate is probably one of the best investments one can make. As long as mankind exists, there is always a need for place to have a shelter above one's head. Space on this earth is limited. So, technically, it is one commodity which is going to be always in demand. It is also a hard investment. It does not evaporate like companies such as Enron which showed profit days before their demise.

Historically, as you can find many books on popular finance, real estate has not performed as well stock market in the long rage. Say 20+ years. But, it is still an attractive investment that is tangible which can be passed on to the future generations. One of the reasons why real estate has not done as well as stocks may be due to the fact that managing real estate can be quite tiresome. Paper work is extensive. In some countries, risk involved in real estate investments can be very high due to unscrupulous people and no easy legal recourse if you are cheated and so on. By any means, investing and managing real estate is far more difficult than managing a stock portfolio.

So, isn't there a way to invest in real estate without much hassle? One option is Real Estate Investment Trusts (REIT). REITs are companies which own real estate properties such apartments, commercial real estate and so on. They sell shares of their stock and public can buy them. REITs also have some special regulations by which they are required to distribute majority of their earnings to share holders in the form of dividends. High dividends also make them very attractive to people who want regular cash inflow.

It may be expensive to buy individual REITs. That's where mutual funds which specialize in REIT stocks come into picture. They are like regular mutual funds but focused only on REITs. There may also be ETFs which specialize in REITs. There are index mutual funds which track the entire REIT market. They are one of the best for people who want invest for long term and would like to have a real estate component in their portfolio. Vanguard offers a good choice of REIT index funds.

REITs have done very well during the last real estate boom. Even after real estate bust, they are doing reasonably well.


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