A Real Estate Investment Trust (REIT) is a pooled investment with a high dividend yield that invests in real estate.
REITs give investors an opportunity for participation and diversification in real estate investments, while also offering much higher degrees of liquidity and lower buy-in amounts than can be found in other real estate investments. A REIT operates much like a mutual fund, and would technically be taxable as a corporation if it weren't for its REIT status.
REITs must distribute 90% of earnings each year to the shareholders (in the form of dividends), and the tax burden falls on the investors. A DRIP is a Dividend Reinvestment Plan, which allows shareholders to reinvest the distributed dividends efficiently to capture the potential of compounding interest.
There are Equity REITs, in which investors hold shares of income-producing real estate, and Mortgage REITs, which either finance mortgage loans or acquire mortgage-backed securities, and there are REITs which are a hybrid of the two strategies.
Investors can also buy shares of REIT mutual funds or ETFs, which may be indexed or actively managed. REITs are often referred to as Alternative Investments, which offer diversification in assets low in correlation to other major asset types.
In recent years, however, many advisors consider REITs to be a core holding, due in part to their ubiquity and in part to the emergence of other liquid assets which offer even lower correlation to traditional investments.
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