10 things you need to know about REITs

If you’ve been paying attention, you may know that REITs, real-estate investment trusts that invest in all sorts of commercial real estate, have been paying off quite well for investors in recent years.

But I’m willing to bet you don’t know everything you should about REITs. Here are 10 examples:

One: Not like buying a house

Though they are based on real estate, REITs are nothing like traditional homeownership. A REIT is much like a specialized mutual fund that may invest in any of a wide variety of companies that build, own and manage commercial real estate.

More than 300 of these companies are registered with the Securities and Exchange Commission. REITs own more than 40,000 commercial properties in the U.S.

REITs give you a chance to own small slices of shopping centers, condominiums, office buildings, housing developments, hospitals, student housing, timberland, parking garages, factories and all sorts of other real estate that (usually, and if properly managed) makes money.

Two: REITs are often volatile

REITs aren’t boring, steady investments. On the contrary, they sometimes go up and down in a big way, and move sharply in and out of favor with investors. When I wrote about REITs in 2007, investors couldn’t get enough of them. Two years later when I wrote about them again, investors didn’t want any part of them.

How’s that for hot and cold?

Three: Strong long-term performance

REITs have a long history of producing good returns. From 1975 through 2006, U.S. REITs had an annualized return of 16.7% — hence their popularity in 2007. From 1975 through 2014, the figure was almost as favorable: 14.1%. That’s more than the 12.2% return of the Standard & Poor’s 500 Index SPX, +0.94% but less than the 15.1% return of U.S. large-cap value stocks.

In fact, in six of those years, REITs had the very best performance among the 11equity asset classes that I recommend. However, see my next point.

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