NEW YORK (TheStreet) -- In 1960, President Dwight D. Eisenhower signed the REIT (Real Estate Investment Trust) Act in order to give all investors the opportunity to invest in income-producing real estate.
The proverbial little fish were given an opportunity to swim in the same pond as the big fish. REITs provide small-scale investors the tool to invest in large-scale properties. If you're a small-scale investor with the desire to own a stake in a townhouse, or even the Empire State Building, you need to invest in a REIT.
A REIT is essentially a stock that sells on the major exchanges while also providing an investor a share of a property or mortgage. REITs enable a company or corporation to use the combined investments of shareholders to purchase real-estate property.
By law, REITs are required to pay out 90% of their profits as dividends to investors in order to qualify for special tax considerations. Modeled after mutual funds, a REIT allows investors -- both large and small -- to own a share of real estate.
There are three basic kinds of REITs:
Equity REITs allow investors to own properties while generating revenue by renting properties.
Mortgage REITs allow investors to own, purchase or loan money for mortgages. The investor profits from the interest earned on the mortgage loans.
Hybrid REITs are investments that combine both equity and mortgage REITs.
"REITs are a good way to put your tie in the water if you want to start playing in the space, but I also suggest you do your homework before picking the REIT that's best for you," said Eitan Ambalu, a principal at Kinneret Group, a commercial real-estate firm in New York.
Why You Should Invest
REITs give individual investors access to assets that would otherwise be unattainable. They bridge the gap between, for example, a small-scale investor in New York and a 500,000 square-foot shopping mall in Portland, Ore. The REIT places everyone on a level playing field regardless of ones geographical location and financial state.
Real estate is generally an undiversified asset. You have a majority of your net wealth in one instance, one asset class, one neighborhood and one city. What happens if something bad happens to that city? We've all heard the tragic Hurricane Sandy stories. Real-estate investment trusts give the investor the opportunity to place his or her eggs in a number of baskets across the country in order to dodge an economically or ecologically destructive bullet.
REITs are bought and sold on major U.S. stock exchanges every day. There are more than 200 REITs traded on U.S. stock exchanges and held by REIT mutual funds and exchange-traded funds, with a market capitalization approaching $1 trillion at the start of 2015. If you aren't satisfied with the performance of a particular REIT, or if you just need the cash, you can sell it in less than a minute, and so there is no need to hang onto the ship while it's sinking.
REITs provide considerably less hassle and risk than buying, managing and maintaining your own building. With a REIT, the cash moves in the right direction. You don't need to stress about having to pay a contractor to repair the roof of your building, collect rents, and deal with evictions. A REIT just might save you a trip to the pharmacy for a Propecia refill.
This article is commentary by an independent contributor.