Real Estate Investment Trusts (REIT) have been available since 1960, but it has only been in the last decade that they have become a major powerhouse on the exchange. Since 2001, REITs have outperformed most other major market benchmarks including the Dow Jones Industrials, S&P 500 and the NASDAQ Composite. So what are REITs and why should you invest in them.

According to Jerry Jerome Cedicci one of the foremost real estate developer in mid west US- "REITs are companies that own, and in most cases, operate income-producing real estate. Currently that real estate includes residential properties, Shopping Centers, Offices, Lodging/Resorts, and regional Malls to name a few.  Some REITs finance real estate others directly own and/or operate income-producing real estate. To be a REIT, a company must distribute at least 90% of its taxable income to its shareholders annually in the form of dividends."

There are three categories of REITs; equity, mortgage and hybrid.  Equity REITs own and operate income-producing real estate. Mortgage REITs lend money directly to real estate owners and operators, or indirectly through loan acquisition or mortgage-backed securities to finance future projects. Hybrid REITs are companies that both own properties and finance development. The growth of REITs has been so significant that Standard & Poors added REITs to its major indexes, including the S&P 500.

So why invest in REITs, why not just buy and sell real estate?  Real estate has traditionally been a stable investment, but it comes with risks that must be borne by a single individual. Properties must be maintained and managed and only realize their full financial benefit when ownership is transferred. With REITs, the investor realizes this benefit every time any property in the REIT is bought, sold or upgraded. The investor reaps the benefit of the income generated from multiple properties without the risk.  If one property does poorly, it will be offset by those that are doing well. And because REITs must pay out almost all of their taxable income to shareholders, investors receive dividends, on average, typically four times higher than those of other stocks.

What about my 401k, that's where I have my money invested. The fact is that institutional investors (such as pension funds) have been slow to jump on the REIT bandwagon. Studies show that only about 10% of the nation's 401k plans even offer REITs to their investors. Call your 401k administrator or check with your benefits specialist and see if the option is available to you.  If not, contact the plan and ask for it.

What about the fees, how much will it cost me? The broker commissions on publicly traded REITs are typically between $20 and $150 depending on the brokerage. Investment banks receive a 5-7% fee to underwrite initial or follow-up offerings. These fees typically are determined by the size of the deal .The minimum investment amount is one share.

Stock exchange rules require that a majority of directors are independent of management. NYSE and NASDAQ rules require fully independent audit, nominating and compensation committees.  The investors re-elect the directors. To ensure that the investors interests are safeguarded, REITs are required to make regular financial disclosures including quarterly and annually audited financial results with the associated SEC filings.

As an example of the growing interest and success of REITs, look at FelCor Lodging Trust (NYSE:FCH).  FelCor Lodging Trust acquires, renovates, redevelops and rebrands hotels.  They went public in 1994 with six hotels and a market cap of $120 million. Five years ago, total return was $1.24. Today, FelCor owns 115 consolidated hotels located in 28 states and Canada with a market cap of $3.3 billion. Twelve years after going public, FelCor's return is $71.39. 

They accomplished this by forming strategic alliances with three of the industry's leading brand owners; Hilton Hotels Corporation, Starwood Hotels and Resorts, and Intercontinental Hotels Group.  Their portfolio includes Embassy Suites Hotels, Doubletree, Sheraton, Westin and Holiday Inn.

This example should show the advantage to investing in a REIT over, or in combination with, personal property ownership. This is just one of the possible 200 REITs currently available for investors to choose from. The increased dividend payouts make them an attractive asset to any portfolio.

Kison Patel is President of National Hotel Exchange. He is a specialist in hospitality transactions. He can be reached at kison@nationalhotelexchange.com

Robin C. Trehan is an industry consultant in the field of mergers and acquisitions. He is also a motivational speaker and knowledge management expert. He can be reached at robin@tafunds.com