How to Invest in Real Estate Investment Trust Mutual Funds

REITs, or Real Estate Investment Trusts, are like mutual funds in that they offer a larger fund investment opportunity that is professionally managed. Unlike mutual funds, REITs focus on the real estate sector only, and were created as a tax protection to some corporations, as well as a way for regular people to invest in commercial real estate. REIT mutual funds allow for one investment in a portfolio of REITs.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• A good background in commercial real estate
• A computer with a high-speed connection to the Internet
• A good understanding of REITs, in general. One good source is the book Investing in REITs by Ralph Block.

1. Get a solid understanding of REITs by visiting the National Association Real Estate Investment Trusts Web site, listed in Resources below, or any site with instructions for first-time investors, a glossary of REIT-specific terminology and helpful articles.

2. Work with someone with experience. Getting a broker or financial professional with experience investing in REIT mutual funds is a good idea, as this is a fairly specific type of investment. Knowledge is power, and if you don't have it you can be putting yourself at a disadvantage.

3. Order the prospectus for each REIT mutual fund in which you're interested.

4. Read each prospectus thoroughly and decide on the one that best fits your financial goals and investment capabilities. The prospectus contains the specifics of each mutual fund, as well as information about the risks of investing.

5. Contact your investment advisor to make your initial investment.

Tips & Warnings

• REITs are required by IRS law to pay out annual dividends of 90 percent of their taxable income. If one of your financial goals is a relatively liquid mutual fund investment, a REIT may be a good choice for you.
• A REIT is not an uncommon choice for an investment portfolio, but it should not make up more than 5 percent to 10 percent of one.
• Due to IRS distribution laws, REITs do not make the best instruments for growth.
• An investment in a REIT is not an investment made in specific commercial properties, but rather it's an investment in larger companies that manage the REITs. Each REIT, in turn, has a manager as well.
• Unless you're particularly interested in the liquidity of a REIT or in commercial real estate specifically, it may make more sense to invest in a more diverse mutual fund.

Resources

• Visit the National Real Estate Investor resource by clicking here.
• Further information can be found at the National Association of Real Estate Trusts Web site.