Real Estate Investment Trusts

Here is the essence of real estate investment trusts -- unless you're flying through the air or on (or in) a large body of water, you're occupying what's called "real estate." It included all kinds of buildings, the land they're on, and land without buildings. That is, nature -- both undeveloped wilderness and farmland or cultured woods.

REITs started in the U.S. as a 1960 law, The Real Estate Investment Trust Act of 1960, because Congress wanted to give small investors a chance to profit from commercial real estate as wealthy individuals and institutions have traditionally done. The first one was set up in 1963. It allowed investors to pool their money to acquire ownership interest in real estate properties, without having to own real estate directly -- especially commercial real estate.

Until then, individuals had to own real estate directly. However, it could be difficult for them to raise enough money to buy a second house or apartment building. Plus, those who did so needed a variety of skills to make the investment profitable, and they were still at risk from business conditions in their local area. Not to mention having to fix toilets at 2 o'clock in the morning.

So far as I can tell, this U.S. law was the first in the world. Since then, the REIT concept with variations had spread throughout the world: REITs can be found in Canada, the U.K., Belgium, France, The Netherlands, Australia, Germany, Japan, Singapore, Hong Kong, Bulgaria, India, and others.

There are now about 190 real estate public securities registered in the U.S.

You can buy shares in private REITs which are sponsored by various real estate businesses and sold to investors by financial planners. However, they are not liquid, because they're not traded on an exchange. They carry large commissions (publicly traded REIT shares are available from deep discount online brokers). Plus, the sponsors also make big money from fees.

There are two types of REIT investments:

Equity REITs -- These REITs are actually in the real estate business. They buy, develop, manage and sell commercial properties. Most real estate investment companies are of this type, and they're what most people mean when they speak or write about real estate investment trusts REITs.

Mortgage REITs -- Mortgage real estate investment trusts make their money by making mortgage loans and investing in them. With the current U.S. subprime mortgage loan disaster threatening to throw the entire country (and possibly the world) into a recession, you'd probably better think twice (and a third time, and a fourth time if you still feel tempted), before buying shares of one of these. Only about 10% of U.S. REITs are of this type.

Some real estate companies have chosen be publicly traded companies, or C corporations, but not to elect the tax status of REITs. These are known as real estate operating companies, or REOCs. Therefore, a REOC is not required to pay any dividends, just like other companies listed on a stock exchange. Therefore, the share price of a real estate operating company is more volatile, because there's no immediate reward for investors.

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