What are Equity Real Estate Investment Trusts

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Equity Real Estate Investment Trusts (REITs -- pronounced "REET" rhymes with "eat") are businesses which primarily invest in commercial real estate.

They buy, lease, renovate, tear down, develop, rebuild, sell and manage commercial real estate properties.

REITs are a tax structure established by the U.S. government to give small investors the opportunity to invest in commercial property without taking the risks and expenses of direct ownership. Congress has traditionally regarded the health of the U.S. economy as closely linked with the real estate sector. Encouraging the flow of investment money into real estate is therefore considered good public policy.

REITs began in the United States with the passage of the Real Estate Investment Trust Act of 1960. The first was actually started in 1963.

In the U.S., real estate investment trusts must pay out dividends to shareholders of at least 90% of their annual net income, have at least 75% of assets in real estate, and get at least 75% of their income from real estate.

Therefore, by paying out lots of cash to shareholders, these businesses avoid the notorious double taxation of C corporations.

On top of that, since one big expense of owning real estate is depreciation, which is a non-cash item, REIT real estate investment trusts are cash flows that actually exceed their "official" operating net income, much of which they pay out of investors.

This has made real estate trust investing highly attractive to investors seeking income from their portfolios.

Equity Real Estate Investment Trusts are listed on stock exchanges and can be bought and sold as easily as any other shares of stock

The big ones are publicly traded. This means that you can buy their stock through a broker just as easily as buying shares in General Electric or Coca-Cola.

It's important to remember that REIT trusts are businesses, not just a collection of real estate properties. DEspite some prejudices, they are NOT mere "mutual funds of real estate." Their ongoing value is highly affected by how well their manage can hold down costs while increasing income and expanding the business.

Sometimes REITs have been called the real estate industry equivalent to mutual funds, but this isn't accurate. Real estate trusts take an active role in the investing and managing of property. They just don't handle them up like a mutual fund manager buys and sells shares of stock.

Plus, these real estate investment groups are vulnerable to various business risks.

A traditional REIT is structured to own its property directly. Some REITs own property through partnerships, down as DownREITs and UPREITs.

The first REIT was added to the S&P 500 October 2001 -- Equity Office Properties, the largest REIT at the time, with a market cap of $12 billion.

These equity REITs are part of the S&P 500 Index:

Therefore, equity real estate investment trusts are the easiest way to invest in commercial real estate properties in the United States.

Next: What are the advantages of investing in Real Estate Investment Trusts -- explanation of REITS

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