Before investing in REITs, individuals should understand what these investment vehicles are and how they operate. Investors should outline goals for these investments, which can help them to make wiser selections. An assessment of an REIT should include the amount of cash that it has. To reduce the risk of losses, investors may want to consider an index fund instead of investing in REITs individually.
REITS are advocated by many investment professionals as a worthy addition to individuals’ investment portfolios. Many people buy into this advice without fully understanding what it is that they are getting into. It is important to understand what REITs are—trusts containing real estate. It is also important to understand how REITs operate. For example, people should be aware that in the U.S. REITs must distribute the majority of their income to shareholders, and the receiving shareholders should realize that this may have tax implications since this form of income is usually classified with regular income.
Before a person starts investing in REITs, her goals should be outlined. One of the primary reasons that this is important is because it can affect the manner in which a person should analyze her options. Those who are looking for long-term investments, for example, need to review more of an REIT’s history than those who are looking to earn in the short-term. Another reason that goal setting is important is because it can help a person to determine the percentage of her investment portfolio that REITs should occupy.
A person’s goals may also determine the REIT that he is interested in. It is not advisable to risk money without knowing what an REIT has and the basis upon which it generates income. For example, one trust may majorly or wholly consist of commercial rental properties, while another may consist of undervalued residences. A person who is looking for consistent income and lower levels of risk is likely to prefer the REIT that concentrates on commercial renting. It is also a good idea to assess how much cash a real estate trust has before investing in it because the ability to acquire new properties is often very important.
It may be beneficial to consider an REIT index fund. Doing so can reduce some of the risk that a person may be exposed to if she chose an individual REIT. This is because the fund should provide a much wider range of diversity than an individual trust. If a person does choose to invest in an REIT index fund, the same care towards assessment and selection should be applied as a person would use when investing in REITs individually.