Although real estate investing can be very profitable, there are some drawbacks, including the need for large sums of money and constant administration. For investors who want to participate in the real estate market without having to deal with the inconveniences of direct property ownership, Real Estate Investment Trusts (REITS) present a strong alternative. This article will assist you in navigating the REIT industry.
- What is Real Estate Investment Trusts(REIT)?
- Types of Real Estate Investment Trusts(REIT)
– Equity REITs
– REITs for Mortgages
– Hybrid REITs - Why Invest in Real Estate Investment Trusts(REIT)?
– Diversification
– Liquidity
– Growth Potential - Advantages of Real Estate Investment Trusts(REIT)
– Diversification
– Regular Income
– Lower Initial Investment
– Professional Management - Disadvantages of Real Estate Investment Trusts(REIT)
– Interest Rate Sensitivity
– Dividend Taxation
– Sector Specific Risks
– Limited Control Over the Access - How to Invest in a Real Estate Investment Trusts(REIT)
– Publicly Traded REITs
– Public Non-Traded REITs
– Private REITs - Conclusion
What is Real Estate Investment Trusts(REIT)?
REIT’s are the companies that own, operate, or finance income-producing real estate across a range of property sectors. These investments allow you to earn income from real estate without having to buy, manage, or finance properties themselves.
Types of Real Estate Investment Trusts(REIT)
Equity REITs
The most prevalent kind of REITs are equity REITs. Income-producing properties in a variety of industries, including residential, commercial, and industrial, are owned and managed by equity REITs. Tenant rent is the primary source of income, and these REITs can profit from the gradual increase in property values.
REITs for Mortgages
Mortgage REITs invest in real estate debt, such as mortgage-backed securities, rather than owning the actual property, in contrast to equity REITs. Interest on these mortgages is their main source of income, and they are typically more susceptible to changes in interest rates.
Related to read: Mortgage Types
Hybrid REITs
These generate revenue from both real estate ownership and real estate-backed debt by combining aspects of equity and mortgage REITs.
Why Invest in Real Estate Investment Trusts(REIT)?
REIT’s historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlations with the other assets also make them excellent portfolio diversifiers that can help to reduce the overall portfolio risk and increase the returns.
Diversification
A REIT is a means to diversify your investment portfolio because real estate frequently has a low correlation with stocks and bonds. Because REITs are required by law to pay out the majority of their profits as dividends, they are attractive to investors looking for income.
Liquidity
Publicly traded REIT’s can be bought and sold on major stock exchanges, providing more much of liquidity than direct real estate investments.
Growth Potential
With a well-performing REIT, investors benefit from both the dividends and the capital appreciation.
Advantages of Real Estate Investment Trusts(REIT)
Diversification
Exposure to the real estate market, which typically has little correlation with stocks and bonds, is offered by REITs. By adding a layer of diversification to your portfolio, you might both increase your risk and balance it.
Regular Income
Publicly traded REITs can be bought and sold on major stock exchanges like regular stock. This liquidity makes it easy to enter and exit positions, providing a level of flexibility that directs the real estate investment.
Lower Initial Investment
Investment in REITs does not require the high capital usually needed to buy the real estate properties. Investors can buy the shares at accessible price points, making it easier to invest in real estate without the sustainable upfront class.
Professional Management
REITs are managed by the professionals who handle property acquisition, leasing, and management taking the burden off investors. This means investors benefit from the expert knowledge without needing to become the real estate expert themselves.
Disadvantages of Real Estate Investment Trusts(REIT)
Interest Rate Sensitivity
REITs particularly mortgages can be sensitive to changes in the interest rate. With interest rate rise, REIT’s dividend yields may become less attractive compared to the other generating investments, potentially leading to price deadlines.
Dividend Taxation
Dividends from the REITs are typically Taxed as ordinary income, which may result in a higher tax rate than the qualified dividends. This can reduce the overall income received, especially for the investors in the higher tax brackets.
Sector Specific Risks
They focus on specific sectors such as retail, hospitality, or healthcare are exposed to specific sector growth. For example- Retail REITs may suffer during economic downturns or the face of increasing the e-commerce trends, while hospitality REITs are highly sensitive to tourism fluctuations.
Limited Control Over the Access
Investors in the REITs do not have direct control over the property selection, management, or investment strategy. This may be the drawback for those who prefer a hands-on approach to real estate.
Related to read
How to Invest in a Real Estate Investment Trusts(REIT)
As discussed above the different types of REITs have unique ways of attracting funding. These differences will be important when we next go through our tips for how to begin investing in REITs:
Publicly Traded REITs
Shares of the publicly traded REIT are listed on the public exchange, where they are bought and sold by individual investors. These fall under the US Securities and Exchange Commission (SEC) regulations.
Public Non-Traded REITs
These REITs are registered with the SEC but don’t trade on the exchange. as a result, they are less liquid than publically traded REITs. As such they tend to be more stable because they aren’t subject to market volatility. Shares of the non-trade REIT can be brought through a broker or financial advisor who participates in the non-traded REITs offering.
Private REITs
These REITs aren’t registered with the SEC and don’t trade on the securities exchange. In general, private REITs are sold only to the institutional investors. They are also the site of many REITs related frauds. While most of course are legitimate investments it’s easier to ply their trades in the area of real estate than within the regulated markets.
Conclusion
REITs offer a unique investment opportunity, combining the benefits of real estate with the convenience of trading stocks. However, their sensitivity to the interest rate, sector-specific risk, and sometimes unfavorable tax treatment mean they are not suitable for every investor. Careful considerations of the investor’s income needs.
