“Water Cooler” REIT Discussion

Let's suppose several of your colleagues are overheard discussing potential investment opportunities around the proverbial "water cooler". You were actually on your way to the copy room when Joe snags you with the question, "Hey Ernie, how 'bout them REITS, eh?" In spite of your efforts to maintain forward motion you realize you're trapped. Thinking they may be a new sports team and managing a weak smile, all that comes out is, "Yeah, they're really cool."

To arm Ernie for "next time", let's figure out what in the world Joe (the know-it-all) was referring to.

The following is an article published by Investopedia, Inc. that may shed some light on the subject.

"The term "REIT" is really an acronym for a "Real Estate Investment Trust". A REIT is a real estate company that offers common shares to the public. In this way, a REIT stock is similar to any other stock that represents ownership in an operating business. But a REIT has two unique features: its primary business is managing groups of income-producing properties and it must distribute most of its profits as dividends.

To qualify as a REIT with the IRS, a real estate company must agree to pay out in dividends at least 90% of its taxable profit (and fulfill additional but less important requirements). By having REIT status, a company avoids corporate income tax. A regular corporation makes a profit and pays taxes on the entire profits, and then decides how to allocate its after-tax profits between dividends and reinvestment; but a REIT simply distributes all or almost all of its profits and gets to skip the taxation.

Individuals can either invest in REITs by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Amongst other things REITs invest in real estate, shopping malls, office buildings, apartments, warehouses, and hotels. Some REITs will invest specifically in one area of real estate, shopping malls for example, or in one specific region, state or country. Basically investing in REITs is a liquid, dividend-paying means of participating in the real estate market. "

So, your response was fairly accurate, REITs ARE "cool". They offer a vehicle for investing in real estate without the leaky water faucets.

To learn more about REITs and knowledgeable responses to Joe's, know-it-all questions, click here.