California investors may be familiar with real estate investment trusts. REITs allow investors to enjoy the benefits of commercial real estate ownership without being burdened by the associated management responsibilities and obligations. REIT shares can be purchased on the open market, and these vehicles often concentrate on a particular type of commercial property, such as apartment complexes, warehouses, retail shopping centers and office buildings.
A direct investment in a commercial property is usually out of the reach of most investors. However, investing in REITs can be an effective strategy for passive ownership and portfolio diversification. Under the applicable laws initially enacted by Congress in 1960, REITs are required to distribute most of their income to their shareholders in the form of dividends, and they are publicly traded.
Most real estate investment trusts are equity vehicles, meaning that they invest directly in certain types of income-producing real estate. Approximately 10 percent of real estate investment trusts are debt-oriented, and they purchase mortgages that arise from the original purchase or the refinancing of commercial real estate. This type of REIT also invests in mortgage-backed securities.
As real estate investment trusts are publicly traded, they are required to provide prospective investors with certain types of disclosure documents mandated by the Securities Exchange Act of 1934. Information regarding the identities of the types of commercial real estate properties owned by a REIT is readily available. People who are considering the purchase of shares in a particular real estate investment trust may want to review the applicable disclosure documents with their attorneys in order to determine whether any problem areas exist.