When we think about "investing in real estate," one of the first ideas that come to mind is that of purchasing property outright. For centuries, it was a privilege granted only to the very rich, based on the simple fact that common folks simply did not (and still don’t) have the economic power to afford multiple properties.
Most people struggle hard enough to make a single mortgage payment, let alone multiple ones, and so the concept of real estate investments eluded the general populus – until now. In the modern era, there is a way for individuals and small investors to get involved in real estate markets: Real Estate Investment Trusts (REITs).
Congress created REITs in 1960, as lawmakers believed that the only way for average investors to gain access to significant commercial properties would be by pooling their resources. REITs were designed to combine the capital funds of many into a single economic package, to be used for commercial real estate ownership and financing. However, REITs went underutilized for more than 30 years because they were restricted to mere ownership, and prohibited from actually operating or managing their properties.
REITs are only meant to produce income, and are not allowed to pass losses on to shareholders, so they had a difficult time competing with the heavily tax-sheltered world of real estate ownership and depreciation during these years. But the Tax Reform Act of 1986 changed everything. It drastically cut back on opportunities to use real estate for tax sheltering, and finally empowered REITs to operate their own properties, which eliminated conflicting interests with third-party management.
REITs have still only come into fashion in the last decade. Real estate markets were slumping heavily in the early 1990s, and when credit and capital for purchases were hard to come by, investors finally discovered the benefits of going in as a group via REITs.
REITs are legally required to pay out 90 percent of their taxable income to shareholders every year and they support the communities in which they are centered with the taxes paid on properties owned. And they have finally given investors the freedom of liquidity in real estate investments, since they are traded publicly on the major stock indexes and no one person is tied exclusively to the properties in question.
REIT investments are also useful for diversifying and stabilizing your portfolio as a whole, since real estate markets don’t always follow the trends of the general marketplace. For example, in the last three years the Standard & Poor’s 500 index has lost more than 10 percent; and REITs have gained more than 14 percent.
On the flip side of the coin, in the late ’90s while the stock market was booming, REITs were losing money. But REIT investments are generally stable for long-term capital growth, due to the relatively stable and predictable stream of rent payments being made. REITs are also somewhat protected from rising costs in the marketplace, since rent costs tend to increase during periods of inflation. Also, property is still a physical asset with a long life, making it a safe investment for the long term.
But as proven time and time again, there are no can’t-miss investments. The key to successful investing is still patience, and REITs follow the same rules of probability that govern the rest of the marketplace.
Remember, whatever your investment, the longer you can commit to leaving your money in, the more likely it is that you will reap gains over time. And of course, if you’ve got the money, actually purchasing property can work for you as well. For most people, this investment takes the form of purchasing a home for themselves, though some buy property to earn rental income as well.
A general rule of thumb is to look for a home that costs two to three times as much as your yearly income, and you’ll want to commit to at least five years of ownership before resale to make sure you get a proper return on investment.
For more information about REITs and your investment opportunities, visit the National Association of Real Estate Investment Trusts at www.nareit.com.
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