A real estate investment trust (REIT) offers several important benefits for investors. A REIT is a corporation with a tax designation that invests in a wide variety of real estate properties. The tax designation allows the REIT to distribute most of its income as dividends, reducing or eliminating corporate income taxes. Investors earn both dividend as well as capital gain income.
One major benefit of owning shares in a REIT is diversification. Diversification is important for investors because it helps to spread risk over a broader range of investments. REITs invest in a wide array of properties which offers the individual a level of diversity they would not be able to achieve on their own by investing in individual properties.
Investors also benefit by being able to earn dividend income through real estate investing. This is not possible when purchasing individual properties. REITs are required to distribute at least ninety percent of taxable income in the form of dividends to the investors. This provides the shareholders with a regular source of income.
Investment in a REIT can also potentially provide a hedge against inflation. Historically dividend growth in real estate investment trust has been higher than the rate of inflation which can help the investor from losing purchasing power due to the effects of inflation.
REIT investments are also liquid investments, unlike real estate property itself. Many REITs are traded on public stock exchanges and can be bought and sold just like shares of stock. While an individual property may be difficult to sell short term, a REIT can be sold easily for cash.
REITs also offer the investor the opportunity to produce good long term total returns. Historically REITs have outperformed other types of equity and real estate investments. Due to their potential for great long term returns and strong diversification, REITs are an excellent investment choice, either on their own or something to add to an investment portfolio.
Perhaps the greatest benefit of a REIT is the fact that it provides passive income for a real estate investor. Investors do not have to purchase individual properties or manage the day to day operations of the properties. Instead, this is left up to professional managers who research, buy and manage the properties. This provides the investor with passive income and a well diversified portfolio with both steady dividend income and the potential to earn an excellent long term return on investment.