A Real Estate Investment Trust (REIT) is a single company or a group of companies which rent out and manage property in order to reap profits for its shareholders (investors). It gives 90 per cent of its profits back to shareholders in the form of dividends, which they then pay tax on. This means the REIT doesn’t have to pay Corporation Tax.

The property a REIT invests in and manages could be residential, commercial or industrial. For the investor, it is a way of benefiting from the high returns property can bring, without having any direct contact with the property itself or the tenant renting it.

Before you buy: tips to consider

Don’t just take a fund manager’s word for it that the REIT he or she is recommending is a top earner. Instead, do lots of homework beforehand; check out its history, recent shareholder dividends and the team behind its management.

Go and see a couple of investment managers to find out what each recommends (if they both advise the same couple of REITs, then you know you’re on to a potential winner). Ask around your property network if anyone has any experience of REITs and if they can share that with you.

Don’t rely on past dividends as a marker for choosing a particular fund. That’s because these will change from quarter to quarter, year to year (because they’re not a fixed rate).

Make sure the REIT you choose is managed by one of its main shareholders (who will therefore have a vested interest in the fund performing well).

What is the REIT’s debt balance like? The majority of REIT’s will have debts (as borrowing is often necessary to expand) but just make sure it’s not too high – otherwise a poorly performing market could tip it over the edge in to having to dissolve.

Does the REIT you are thinking of investing in have good buildings with decent tenants? And if so, are they the type of tenants that are responsible and stay around (i.e. professionals rather than students etc.)? Don’t invest if you don’t like what the company is letting and who to.

REITs can prove an excellent addition to your property portfolio, but think carefully about how much you’re investing in them i.e. don’t put all your eggs in one basket. It’s always a good idea to diversify when it comes to property investment so that if one area begins to divebomb, then your more profitable areas will compensate.

Remember that you’ll still have to pay tax on the income you receive from REITs. This will be taxed by HMRC, as if you yourself were letting out the property (i.e. 20 per cent for basic rate taxpayers and 40 per cent for higher rate payers).

When you decide to move on and sell your REIT shares, there’s also the business of Capital Gains Tax – you’ll be eligible for that too; this is the profit that you made (if any) from selling the shares.