I get a steady stream of questions about investing in Real Estate Investment Trusts and whether they are better than owning a rental property or a house at the beach. My usual response is that there is a fundamental difference in the two: One is a stock investment and the other is direct ownership of real estate, with all the responsibilities that involves.

The problem I have with REITs is the same one I have with stock in general. It is, by definition, a passive investment. The management of the company is not interested in my opinion, and I can't help the company by buying the product. All they really want is my money; in exchange, they give me a return.

In contrast, a rental house is a part-time job. I can improve the property, paint the property, carpet the property and do any of a thousand things to help the rental property not only pay for itself but go up in value on a regular basis while delivering me a nice deduction I can use as a tax shelter against other income.

Real Estate Investment Trusts are essentially companies that buy commercial property and apartment complexes, then sell stock to fund those purchases. When real estate does well, REITs do well and offer a relatively painless way for investors to add a real estate component to their portfolio.

One example of a REIT we hear about locally is Cousins Properties, based in Atlanta. This REIT acquires, finances, develops, manages and leases a portfolio of properties in major cities. It owns office, medical and retail projects and even owns some well-located tracts of land for future development. The company stock is traded on the New York Stock Exchange.

But a REIT lacks flexible leverage, tax benefits, income to pay for the investment itself.

It is relatively easy for an investor with reasonably good credit to obtain long-term, low- interest rate financing for a rental house. That financing might be for as much as 90 percent of the value of the investment and still be competitive in terms of rate.

The ability to use other people's money to fund your investment is called leverage, and typically the higher the degree of leverage involved, the greater the risk of loss.

However, residential real estate is an exception to that rule. You can highly leverage your real estate and experience little increase in risk of loss. That's because real estate is such a stable long-term investment. Real estate is a slow but steady performer. That stability encourages lenders to make long-term financing available at very low rates.

In contrast, most REITs involve debt in their acquisition of property for their portfolio. But they typically limit their leverage to about 50 percent of their portfolio value, a lesser degree than many might consider comfortable in a home.

If my assessment seems slanted toward rentals and away from stocks (and I classify REITs as a real estate stock), then so be it. I am firmly convinced that, for the average American, the best investment to make is in their own house.

Here are some basic questions about REITs:

Q: What is a Real Estate Investment Trust?

A: Think of a REIT as if it were a mutual fund for real estate. A REIT is a company that buys, owns and, in most cases, operates income-producing real estate such as apartment complexes. Some REITs also engage in financing of real estate. The shares of most REITs are publicly traded.

Q: How do REITs work?

A: Under federal law, REITs are allowed to deduct dividends paid to shareholders from their corporate taxable income. Most pay out all of their income to shareholders and owe no tax. Shareholders pay tax on dividend income and capital gains.

Q: Why were REITs created?

A: Laws enabling the creation of REITs were passed in 1960 as a way of allowing smaller investors to pool their resources and take advantage of large-scale, income-producing real estate. There are about 180 REITs registered with the Securities and Exchange Commission, with assets in excess of $300 billion.

Q: What do REITs invest in?

A: REITs invest in a variety of property types such as shopping centers, apartments, warehouses, office buildings and hotels.

Q: How do you invest in a REIT?

A: Through a stockbroker. For a free copy of "The Investor's Guide to REITs," visit my Web site at www.money99.com and click on Additional Resources, then Free Documents.

 John Adams is a broker and investor. He hosts the "John Adams Radio Show," a call-in program dealing with homeownership and real estate, from 1 to 3 p.m. Saturdays on NewsRadio 640 (WGST). For more real estate information or to make a comment, visit www.money99.com.