Today, many investors would gladly trade the uncertainty of the stock market for the certainty of collecting a rent check from commercial real estate. However, short of hitting the lottery, most would find it difficult to come up with the money to buy a piece of the skyline or their favorite shopping center. In 1960, Congress created the Real Estate Investment Trust (REIT), recognizing that by pooling the interests of the average investor the commercial real estate market could be stimulated.

A REIT is a company whose sole purpose is to own and/or operate income-producing real estate, such as apartments, shopping centers, offices and warehouses. Some REITs engage in financing real estate. What makes REITs unique is the requirement that they pay at least 90% of their annual income to their shareholders. This payout can also include non-taxed income representing cash flow from depreciation.

REITs were not a large factor in real estate investing for the first 30 years of their existence. Initially, tax laws made real estate an attractive tax shelter for investment capital using partnership arrangements. And REITS could only own property; they could not manage or operate property. Finding managers whose interests were aligned with the REIT was difficult.
The Tax Reform Act of 1986 materially altered the real estate investment picture. Out went the more abusive tax-shelter elements. REITs were granted the right to own and manage property. But it took the commercial property depression of the early 1990s brought about by overbuilding to encourage real estate companies to seek capital from the public investment markets and individual investors.

As an investment, REITs offer a number of attractions. Since they must pass essentially all of their operating income through to shareholders, there is reduced opportunity for management to turn the REIT into a private piggy bank.

And because public REIT shares trade on the stock exchange, investors have liquidity in their real estate investments. They may buy and sell a diversified portfolio of properties, as well as the management, on an instantaneous basis.

Finally, REITs offer the security of owning real estate with a long life and the potential to produce income. When compared to owning public company bonds or dividend-paying stocks, payment of rents to an investor take priority over payment of bond interest and stock dividends.

REITs are available in three forms:

1. Investors may buy the individual REIT public stock. The stock prices will fluctuate with the market, but they have the advantage of minute-by-minute valuation and immediate liquidity.
2. REIT mutual funds own portfolios of individual, public, REITs and other companies engaged in real estate activities. This provides the small investor with an opportunity to own a widely diversified portfolio of real estate related investments.
3. A number of sponsors sell private REITs. Like the public REIT, they pass through to investors at least 90% of their income. Unlike the public REITs, however, the price is stable, and since it is not quoted daily, it is an ideal way for nervous investors to participate. Liquidity is limited to cashing out at pre-determined times in the year when management values the holdings.

Investors seeking to outpace inflation should be encouraged by the fact that equity investments in real estate have historically outpaced inflation, according to U.S. Dept of Commerce Labor Statistics, CPI (1982–2001).

In a study titled “Homeownership and Investment in Real Estate Stocks” prepared for the National Association of Real Estate Investment Trusts, economist Jack Goodman concluded that individual investors build greater long-term financial wealth when they combine homeownership and REIT stocks as part of a diversified investment portfolio.