A Primer on Real Estate Investment Trusts (REITs)

With the economy swinging back into the black, many people are looking for new ways to invest

their money, albeit with some reservations about risk after the last crash. Real estate investment

is a way for people to put money into something they can see—in the case of direct property

investment, anyway. Apartment housing can offer a steady, reliable income stream, assuming

the investor is prepared for the rigors of tenant screening and all the other responsibilities of

property management. But there's another way to invest in real estate that has some distinct

advantages over traditional approaches.

Real estate investment trusts (REITs) are an alternative method for entering the real estate

market. Instead of buying property directly, the investor purchases shares in a trust, which is a

group of companies that actively participate in the broader real estate market. The most obvious

advantage of an REIT is the low cost of entry. Instead of the entire property, the investor only

buys shares—it's the difference between a few dollars and tens of thousands of dollars. When

the time comes, it's equally easy to sell off those shares. A shopping mall, on the other hand,

takes much more time and energy tosell.

Debt load is another consideration when deciding to invest in real estate. Few people have the

cash lying around to purchase an entire apartment complex, for example. Typically, the investor

will make a substantial down payment and then assume the rest of the cost as a debt obligation.

That obligation is real and binding, and doesn't go away if the property turns out not to be a gold

mine. REITs incur no debt, because the investor is only buying shares in a company, not real

property. The investor risks only the money they invest, not additional leveraged debt.

For anyone who has had experience being a landlord or property manager, the twists and turn

of screening tenants and staying on the right side of local regulations are many. A residential

lease agreement is a legal contract, and should therefore be drawn up by an attorney or

professional legal forms service. There is often the burden of performing tenant credit

screening, maintaining a safe environment for all tenants, and dealing with those who won't pay

their rent. Property management can quite literally be a full-time job.

Still, despite its added load of responsibilities, there remain some advantages to investing

directly in a property. A successful investment property pays for itself, eliminating the burden of

debt rather quickly. A full 100-unit apartment complex represents 100 people paying rent each

month. Returns on REITs can’t produce that kind of regular income stream. Likewise, direct

investment provides more control over what one is purchasing. It's easier to spot a bad

investment when you can see and touch it, or better yet, hire your own inspector to go through

the structure and test for problems. Traditional real estate ownership also confers tax benefits

not available with REITs. Maintaining a property is counted as a cost of doing business, which

can then be deducted from total income.

The question remains: which option is better? The answer is (of course): it depends. While

diversity is a good end goal, beginning investors may gravitate toward REITs because of their

lower upfront costs and protection against disasters. As these investors become more confident

with the real estate market, direct investment may become a more appealing alternative, if for

no other reason than pride of ownership.