Real
estate investment trusts (REITs) are an increasingly
popular and accessible way to invest in real estate. These
publicly traded trusts and associations trade like stocks
but work like mutual funds. Your capital is pooled with
other people's to invest in apartment and office buildings,
shopping centers, industrial buildings, hotels, and other
real estate ventures. The trust makes the investment decisions,
and its shares trade on the stock market.
There are three types of REITs:
Equity
REITs buy properties that produce income or have
growth potential. Some specialize in certain
types of properties, while others are more diversified.
Mortgage
REITs invest in real estate loans and start-up
offerings.
Hybrid
REITs make both types of investments.
The REIT choice
REITs can be an attractive addition to a diversified investment
portfolio for a variety of reasons:
Unlike
direct investments in real estate, REITs do not
require substantial initial investments
They
are relatively liquid in
that their shares can be easily bought and sold
REITs
tend to have low correlations with more traditional
asset classes, which means that they may be able
to lower the overall volatility of your portfolio
The
yields on REITs can be high, since most of the
trust's annual income is distributed to investors
Limited partnerships
A limited partnership is a financial affiliation of a general
partner and a number of limited partners that usually invests
in a particular type of income-producing property, such
as shopping malls or low-income housing. What makes the
partnership limited is that everyone but the general partner
has limited liability — which means they can lose
only their initial investment if the project fails.
Some limited partnerships are public, which means you can
participate by buying shares through a brokerage firm.
Others are private and are usually restricted to high net
worth individuals.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
See how
REITs can add diversity to your portfolio.
The research
of Ibbotson Associates indicates that REITs historically
have earned competitive returns and have exhibited lower
volatility than other types of stock. In addition, the
correlation of REITs to the returns of other stocks and
bonds has declined significantly in recent years. For
these reasons, REITs may help to raise returns and lower
risk in your investment portfolio.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 
