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Should you invest in a real estate investment trust (REIT)?

Investing in a real estate investment trust (REIT) is similar to investing in any corporate stock.

You can obtain shares in REITs from the same sources you might visit to acquire corporate stock—investment brokers or other financial services centers.

Try the mutual fund route

In addition, you can buy shares in mutual funds that invest in REITs. The National Association of Real Estate Investment Trusts (NAREIT) lists on its Website several dozen mutual funds that invest in REITs: www.reit.com. This list includes a number of no-load funds and provides complete contact information for all funds listed.

The Association's Website also provides much other useful information to investors who are in the process of selecting a particular REIT investment. For instance, it offers several historical reports of REIT performance by sector (healthcare, industrial/office, retail, etc.). A real-time market index reports current returns for equity REITs and all REITs.

How to contact NAREIT

Besides online, you can contact the NAREIT by mail or phone:

1875 I St., NW, Suite 500

Washington DC, 20006

(202) 739-9400 or (800) 3-NAREIT

Advantages and disadvantages of investing in a REIT

Like any investment, REITs have pluses and minuses. Certainly, they carry more volatility than government securities and money market funds.

The cons

Some investors and financial advisors steer clear of REITs altogether, believing that their potential downside is too great. They point out that the basic problem with REITs is real estate—property that cannot be moved to other locations or easily altered when a problem arises in a particular sector.

For instance, if you acquire shares in a REIT that invests heavily in residential developments that don't attract buyers or renters, the REIT's managers will have a hard time meeting their profit expectations or selling the property. And REITs that invest in mortgage loans can post poor performances following drops in interest rates.

The pros

Other investors and financial advisors are REIT advocates, strongly believing in the ability of REITs to add considerable income potential to a portfolio with a reasonable level of risk. They point out that many REITs have performed well over time and that conservative investors can lessen their risk by investing in REITs that have diversified investments or in mutual funds that invest in multiple REITs.

These advocates also remind us of the tax advantage of being able to deduct up to $3,000 of regular earnings on your income tax return if you incur a loss through your REIT.

All in all, REITs can provide a high yield and a hedge against inflation for investors comfortable with a certain amount of risk. Remember, the risk—and potential rewards—tend to be higher for REITs that invest in mortgage loans than for those investing in equity.

Dive deeper: REITs: Everything you need to know about Real Estate Investment Trusts

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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