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QUESTION: I’ve owned a home for a few years and would like to invest in more real estate, but I don’t want to have the headaches of being a landlord. Someone mentioned that I should look into a real estate investment trust. How do real estate investment trusts work?

ANSWER: Investing in real estate can be lucrative, if you know what you are doing. But you are right, unless you use the services of a property management company, you do need to handle landlord responsibilities. A real estate investment trust (REIT) can be a valuable way to increase the amount of real estate in your portfolio without requiring your hands-on presence.

REITs were created by Congress in 1960 so that investors without the millions of dollars required to invest in commercial property could invest in real estate. Many REITs are publicly traded on stock exchanges and own a variety of property such as shopping malls, shopping centers, offices, hotels, apartments, self-storage facilities, industrial warehouses and healthcare facilities such as medical offices and assisted living facilities. Most REITs manage their property as well as own it. Some REITs don’t own property at all and invest instead in mortgages. Other REITs are not publicly traded. Individual investors can buy REIT shares instead of entering into a real estate partnership.

Like any other investment, the performance of individual REITs fluctuates for a variety of reasons. The best resource for information about REITs is the National Association of Real Estate Investment Trusts (NAREIT), which has extensive research and data on REITs. According to NAREIT, the average annual return on equity REITs between January 1978 and December 2010 was nearly 12.3%.

During the recession, REITs often performed stronger than other investments because many of them had less debt than private real estate investors prior to the downturn, and some also sold property at the height of the real estate boom. The greater financial strength of REITs allowed many of them the ability to purchase discounted property from distressed private investors during the recession.

REIT Opportunities

Most REITs invest in a particular property type and diversify by owning property in a variety of markets in the United States and sometimes overseas.

Among the publicly traded REITs, the following property sectors are represented:

• Retail: 26%
• Residential: 13%
• Office: 12%
• Healthcare facilities: 11%
• Lodging and Resorts: 7%
• Self-storage: 6%
• Timber: 5%

Over the past two decades, according to NAREIT, many REIT property sectors have earned double digit returns:

• Self-storage: 16%
• Healthcare: 12%
• Office: 11%
• Retail: 11%
• Residential 11%

Future performance of individual REITs depends on a variety of factors, including the economy and the internal management of each REIT. Different property sectors are impacted in different ways by macroeconomics.

For example, the retail sector tends to be affected by consumer confidence and employment, but REIT shopping center owners have taken steps to adjust their property model to offset sluggish retail spending, such as adding more restaurants and drawing people to shopping centers and malls for the experience rather than individual stores. Individual REITs within each property sector often focus their investments in a particular geographical area or property type, such as medical offices or high-end luxury hotels.

While REIT investments require less time and energy than buying property on an individual basis, you still need to do your due diligence and research any fund before you choose to invest.

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Send your real estate questions to Michele at advice@realtor.com. and she may answer them in upcoming columns.

Michele Lerner, author of HOMEBUYING: Tough Times, First Time, Any Time, has been writing about real estate and personal finance since 1990. Her work has appeared in The Washington Post, MSN Real Estate, Fox Business, The Motley Fool, Bankrate, HSH.com, The Washington Times and Daily Finance.