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How do you choose an REIT for your portfolio?

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Quick Answer

Investors typically choose a real estate investment trust, known as a REIT, for a portfolio by evaluating the company's management, diversification strategy and earnings performance, according to Investopedia. Since investors should ideally base their strategies on individualized goals and risk profiles, no single strategy exists for selecting REITs that works for everyone.

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Full Answer

A REIT, pronounced as "right," is a trust company that owns and usually operates income-producing real estate, such as office buildings and shopping malls. Investors buy shares of the REIT, giving them a portion of the revenue generated by the collection of commercial property without having to own the property themselves, according to the U.S. Securities and Exchange Commission.

Evaluating the management of a REIT is the first step in determining if the investment is appropriate for an investor's portfolio. Managers with good track records pick the right assets to add to the REIT and manage the properties with a profitable bottom line, according to Investopedia. Diversification of assets is another evaluation criteria because REITs with a variety of types of real estate in their asset pools are more likely to endure downturns in specific sectors of the real estate market over time.

An investor should also spend time evaluating the overall performance of a REIT before deciding to add the investment to a portfolio. As explained by Investopedia, overall performance is a measure of a REIT's funds generated by its operations and the cash available for distribution to its investors.

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