How Do You Earn Money from a REIT?

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Earning money from a publicly owned real estate investment trust (REIT) is like earning money from stocks. You receive dividends from the profits of the company and can sell your shares at a profit when their value in the marketplace increases.

Of course, the amount you earn depends largely on the successful management of the REIT, as well as market conditions. A REIT often can provide a reasonable return of 5–10 percent or more.

On the other hand, building a successful REIT requires considerable management skill. When a REIT runs into a problem with a particular property, the REIT cannot sell it as quickly or easily as, say, a mutual fund can sell poorly performing stocks or bonds.

As an investor, you will want to review a REIT's equity and mortgage properties before purchasing its shares.

As an investor, you will want to review a REIT's equity and mortgage properties before purchasing its shares. Some REITs carry a lot of risk, while others offer much more stability. In general, shares in REITs that invest heavily in mortgage loans may be more volatile than shares in REITs that focus on equity investments, since fluctuations in mortgage loan interest rates can quickly affect the REITs' performances.

REITs have certain tax advantages and rules to follow. For instance, 90 percent of a REIT's net earnings must be distributed each year to shareholders, in order to avoid corporate taxes. This rule results in higher income for the investor.

In the event your REIT investment loses money, you can deduct up to $3,000 of your losses from your taxable income, which can offset other income and gains in other investments.

While REITs take much of the risk and hassle out of investing in real estate, that doesn't mean they're worry-free. It's important to understand the dynamics of the real estate market, as well as the performance of a particular REIT, before you buy your shares.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.