Advantages and Disadvantages of REITs

March 30, 2012 — 3,086 views  
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Real estate investment trusts (REITs) are companies that own and operate real estate that produces income, according to the U.S. Securities and Exchange Commission. They allow investors to own a share of a shopping mall, hotel or office building or other similar property without having to buy commercial real estate.

One good thing about an REIT is it allows an investor to build a diverse investment portfolio. REITs also boast a variety of advantages to companies that qualify. For example, StreetAuthority explains those that qualify as REITs for tax purposes have a roughly 6 percent annual dividend yield, and this can help smooth out a company's overall returns. Furthermore, REITS are usually some of the more stable companies because they own these tangible properties.

Like most things in life, REITs do not come without risk. Dividend payments are not guaranteed and the market is never predictable. Most investors, however, do not consider these factors to be a deterrent. It's important to remember, though, that because REITs can only reinvest 10 percent of annual profits back toward their core business, growth can be slow.