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If you've been thinking seriously about your investments, you've probably heard about opportunities to add real estate to your portfolio. While this addition can be valuable from a diversification standpoint, not everyone can afford the initial costs or deal with the required maintenance.
Real estate investment trusts, or REITs, provide a useful entry to real estate investing. Because they allow for partial ownership and multiple holdings to distribute risk, they can help you achieve strong returns while potentially being better suited to your needs and goals than traditional real estate investments.
Real estate investment trusts are companies that develop and run income-producing properties. Examples of these properties include apartment complexes, strip malls, storage facilities and hotels. The REIT develops and maintains the property to earn from it, as opposed to selling it for a profit.
There are two types of REITs: an equity REIT and a mortgage REIT. The former refers to a trust that owns physical properties. A mortgage REIT invests in mortgages or mortgage-backed securities, or it loans money to real estate developers. Mortgage REITs are less common than equity REITs. You can also invest in hybrid REITs, which combine both equity and mortgage assets, though these are also less common than equity REITs.
When you invest in a REIT, you're entitled to a percentage of the profits generated by the property. The advantage of investing in a REIT, especially if you're in a lucrative market, is that you can diversify your portfolio without having to buy any properties yourself.
There are a couple ways you can buy into REITs. One is to hand-select the REITs you want to invest in. The other option is to invest in an exchange-traded fund, or ETF, that has numerous REITs in its portfolio. You get to take advantage of the ETF's diversification without needing to choose real estate projects on your own.
Real estate investment trusts can be a valuable investment, although you have to consider your priorities and investing style. Would you prefer to be more hands-on with a real estate investment? Are you comfortable with the possibility of not being able to sell your assets quickly? A trusted financial advisor can help you think through the pros and cons to determine whether REITs are a fit for your portfolio.
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This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.
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