What Is a Real Estate Investment Trust (REIT)?

Real estate is a favorite among some investors. It provides many investment benefits and flexibility not found in other investments. There is one problem, though: it is not a small investment. For most folks, homeownership is the largest and only real estate investment they have. Yet many advisors suggest diversifying one's portfolio with assets other than stocks and bonds—like real estate. A REIT might be a way to add that diversification.

A real estate investment trust, or REIT (pronounced "reet"), is a company that owns, manages, and/or operates real estate in order to earn profits for shareholders. About 70 percent of the more than 300 REITs operating in the United States are publicly traded on the New York Stock Exchange, American Stock Exchange, or NASDAQ. The assets of all REITs total more than $138 billion, according to the National Association of Real Estate Investment Trusts.

Congress opened the door to REITs in 1960 to enable small investors to participate in large commercial real estate ventures. Originally, REITs could own real estate but not manage or operate it, until the Tax Reform Act of 1986 expanded their powers. Since then, REITs have grown incrementally; the number of publicly traded REITs nearly tripled between 1978 and 1998.

Sometimes people compare REITs to real estate limited partnerships. While both entities invest in real estate, significant differences exist between the two. One is organized as a partnership, the other a corporation. One major difference is that a board of directors elected by the investors governs a REIT. A real estate limited partnership, in contrast, is managed by a general partner who sometimes cannot be easily removed by the limited partners.

Individuals and mutual funds are the largest investors in REITs. A wide variety of organizations such as pension funds, endowment funds, insurance companies, and bank trust departments also invest in them.

REITs offer a way to invest in real estate without actually having to buy properties yourself.

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