Individual investors who are retired or approaching retirement often seek investments that provide appreciable and dependable sources of income. Younger investors also may seek income-producing investments as part of their strategy for reducing the volatility and protecting the value of their portfolios. Real Estate Investment Trusts (REITs) dividends help to stabilize the value of individual stock portfolios because the contractual rental income from their properties is similar to the interest payments on bonds.  Many investors regularly turn to Treasuries, corporate and municipal bonds and utility stocks to satisfy their income-producing investment objectives. However, two notable shortcomings of these investments are that they provide little protection against inflation and few, if any, opportunities for growth. REITs stocks on the other hand, provide substantial and dependable dividends that also provide a measure of protection against the corrosive effect of inflation because of the tendency for rents to rise during periods of rising prices. Moreover, REITs earnings are likely to grow over time as rents rise, economies of scale are realized, and operating margins expand.

REITs dividends have grown at an average annual rate of 6.6 percent since 1992, a rate that has exceeded the rate of consumer price inflation each year.
 
REITs related links:

http://www.nareit.com/  National Association of Real Estate Investment Trusts
http://www.uli.org/dk/index.cfm Urban Land Institute
http://www.inrealty.com/ InRealty - Internet Information for Institutional & Commercial Real Estate Investments.
http://www.realtystockreview.com/
http://www.dividenddiscountmodel.com/
http://www.nahb.com/ National Association of Home Builders
  
   

A REIT is a company that buys, develops, manages and sells real estate assets. REITs allow participants to invest in a professionally-managed portfolio of real estate properties. REITs qualify as pass-through entities, companies who are able distribute the majority of income cash flows to investors without taxation at the corporate level (providing that certain conditions are met). As pass-through entities, whose main function is to pass profits on to investors, a REIT's business activities are generally restricted to generation of property rental income. Another major advantage of REIT investment is its liquidity (ease of liquidation of assets into cash), as compared to traditional private real estate ownership which are not very easy to liquidate. One reason for the liquid nature of REIT investments is that its shares are primarily traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell properties in private markets.

The origins of the real estate investment trust date back to the 1880s. At that time, investors could avoid double taxation because trusts were not taxed at the corporate level if income was distributed to beneficiaries. This tax advantage, however, was reversed in the 1930s, and all passive investments were taxed first at the corporate level and later taxed as a part of individual incomes. Unlike stock and bond investment companies, REITs were unable to secure legislation to overturn the 1930 decision until 30 years later. Following WWII, the demand for real estate funds skyrocketed and President Eisenhower signed the 1960 real estate investment trust tax provision which reestablished the special tax considerations qualifying REITs as pass through entities (thus eliminating the double taxation). This law has remained relatively intact with minor improvements since its inception.

REIT investment increased throughout the 1980s with the elimination of certain real estate tax shelters. Investments in real estate provided investors with income and appreciation. The Tax Reform Act of 1986 allowed REITs to manage their properties directly, and in 1993 REIT investment barriers to pension funds were eliminated. This trend of reforms continued to increase the interest in and value of REIT investment.

Today, there are over 300 publicly traded REITs operating in the United States their assets total over $300 billion. Approximately two-thirds of these trade on the national stock exchanges.

In order for a corporation to qualify as a REIT and gain the advantages of being a pass-through entity free from taxation at the corporate level, it must comply with the following Internal Revenue Code provisions:

Structured as Corporation, business trust, or similar association
Managed by a board of directors or trustees
Shares need to be fully transferable
Minimum of 100 shareholders
Pays dividends of at least 90 percent of REIT's taxable income
No more than 50 percent of the shares can be held by five or fewer individuals during the last half of each taxable year
At least 75 percent of total investment assets must be in real estate
Derive at least 75 percent of gross income from rents or mortgage interest
Have no more than 20 percent of its assets consist of stocks in taxable REIT subsidiaries
REITs fall into three broad categories:

Equity REITs: (96.1%)
Equity REITS invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: (1.6%)
Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: (2.3%)
Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages.

Individual REITs are able to distinguish themselves by specialization. REITs may focus their investments geographically (by region, state, or metropolitan area), or in property types (such as retail properties, industrial facilities, office buildings, apartments or healthcare facilities). Certain REITs choose a broader focus, investing in a variety of types of property and mortgage assets across a wider spectrum of locations.

The current REIT industry's investment choices can be broken down by property type as follows:

Retail 20.1%
Residential 21.0%
Industrial/Office 33.1%
Specialty 2.3%
Health Care 3.8%
Self Storage 3.6%
Diversified 8.5%
Mortgage Backed 1.5%
Lodging/Resort 6.1%
In general, REITs and their performance have some common characteristics with small-cap stocks and bond-like investments. The market capitalization of the average REIT on the Wilshire Real Estate Securities Index is $340 million. REITs comprise 6% of the small-cap index, the Russell 2000. However, REITs have advantages over stocks and bonds in terms of dividends: between 1995 and 2000, the average dividend yield on REITs (7.3%) is six times that of the Russell 2000 average dividend. Furthermore, all REITs pay dividends, whereas less than half of the Russell 2000 stocks pay dividends.

The long term performance of an individual REIT is determined by the value of its real estate assets at any given time. One of the primary incentives for REIT investment is the low correlation of its value to that of other financial assets. Because of this, REITs possess low relative historical volatility and provide some degree of inflation protection. In addition to the advantages of an investment which avoids double taxation and requires no minimum investment, REITs offer investors current income that is usually stable and often provides an attractive return. Another factor attractive to the investor is that a REIT's performance is monitored on a regular basis, by independent directors of the REIT, analysts, auditors, and the business and financial media.

Source: REITs.com