What is a REIT (Real Estate Investment Trust)? What Should I Look for When I am Ready to Invest in a REIT?


1. What is a REIT?

2. The Basics of Investing in REITs

3. What Do I Need to Know Before Investing in REITs?

4. Advantages of REITs

5. Types of REITs to Invest In

6.  The Concluding Words

 

1. What is a REIT?


A Real Estate Investment trust (REIT) is an investment fund or security that owns and operates income-producing real estate. The company manages income-producing properties across a range of property sectors. However, these companies have to meet several requirements to qualify as REITs and allow individuals to invest in large-scale, income-producing real estate.

 

The properties or assets may include shopping malls, office buildings, apartments, hotels, warehouses, self-storage facilities, and mortgages or loans. Unlike other real estate companies, A REIT neither develop nor resell these properties. Instead, they buy and develop them to operate them as part of their investment portfolio.   

 

Most REITs trade on major stock exchanges and present many investment opportunities to investors to access dividend-based income. The companies allow anyone to invest in portfolios of real estate through the purchase of individual company stock or exchange-traded fund (ETF) or a mutual fund.  The REIT investors earn a share of the income via real estate investment.

 

2. The Basics of Investing in REITs

 

As far as the purpose of investing in REITs is concerned, it is to be able to invest in real estate assets and earn a profit. Buying big real estate is otherwise not possible for all individuals and this is where  investing in REITs makes sense. It allows you to put your money in properties and gain exposure to billion-dollar commercial property portfolios. The best part is that you can just start with a few hundred dollars.

 

Lets understand how does a company become a REIT

REITs allow both small and big investors to acquire ownership in real estate ventures and these companies are governed by a law that aims to provide investment opportunities. It is quite similar to mutual funds or stocks traded in the market.

 

However, it is important to understand how a company can call itself a Real Estate Investment Trust or REIT and the following points might help

REITs must be structured as corporations with at least 100 shareholders or investors and none of them can hold more than 50% of the shares.

REITs must invest at least three-fourths or 75% of their assets in real estate or related assets such as cash or treasures.

REITs are required to pay out at least 90% of their taxable income as a dividend to shareholders.

REITs must be managed by a Board of Directors or Trustees.

 

As you can see, there are some pretty strict requirements for a company to qualify as REIT but still many want to be classified under this category. Wondering why?

 

Well! There are some big reasons why companies want to become a REIT and some of them include

 

REITs are not treated as ordinary corporations for tax purposes which means it will pay no corporate tax no matter how much profit it earns. However, it needs to pay 90% of its income to the shareholders.

 

3. What Do I Need to Know Before Investing in REITs?

 

REITs provide a way for individual investors to make profits via earning a share of the income produced through real-estate ownership. Many REITs are registered with the SEC so that they can be publicly traded on a stock exchange. The investors do not even have to go out and buy commercial real estate to start earning.

 

REITs offer a way to include real estate in your investment portfolio but you need to look for several things before investing. Weve created a list of things that you need to know, check them out

 

Eligibility: The REIT offer document or prospectus indicating the eligible categories for those who can invest.    

 

Tax Implications: The income earned from REITs is subject to tax depending on the laws and regulations in your country.

 

Refunds: If the subscription amount is somewhat lesser than 90% of the issue size, you will get your money refunded.

 

Types of REITs: Before investing, you should know the different types of REITs that include Equity REITs, mortgage REITs, and hybrid REITs.

 

Analyze REITs: Most REITs are dividend-paying stocks that focus on real estate and if you want to earn profits, you need to analyse them appropriately.

 

Net Asset Value: Knowing the net asset value will help you understand the other common REIT metric and a balance sheet can help.

 

Top-Down vs. Bottom-Up Analysis: When investing in stocks, you will hear these two terms and REIT stocks require both top-down and bottom-up analysis.

 

Economies of Scale: As REITs deal with real assets, the companies often seek growth through acquisitions and assimilating inefficiently run properties.

 

Avoiding Fraud: It is important to verify the registration of both publicly traded and non-traded REITs to avoid fraud.  

 

Best REIT Stocks: It is important to know some of the top-performing REITs if you want to invest in something profitable.

 

4. Advantages of Investing in REITs

 

 

Long-Term Investments: If you are interested in long-term investments, REITs can be an excellent way to get started. You can invest in big real estate ventures without and expect excellent return potential in owning properties for a long period.  

 

Investment Portfolio Diversification: If you want to diversify your investment portfolio, investing in REITs can be the best option. It allows you to invest in stocks that technically represent real estate assets.   

 

Source of Reliable, Growing Income: For beginners, REITs can be an excellent source of growing income as most companies lease their properties on a long-term basis. Also, you can expect a steady income, quarter after quarter.  

 

Transparency and Lower Risk: REITs will showcase the full valuation every year along with an update on a half-yearly basis. Also, there is less risk as at least 80% of the assets will have to be invested into revenue-generating projects.

 

Lower Volatility: REITs tend to be less volatile than traditional stocks and this is what makes them an ideal choice for investors. Also, REITs can act as a hedge against the ups and downs of other asset classes.  

 

Just like other investments, REITs do have some cons that you should know before investing. Here weve listed some important ones

 

Illiquid: The non-traded and private REITs need to be held for years to enjoy potential gains.

 

Heavy Debt: REITs have a lot of debt but typically have long-term contracts that generate cash flow.

 

Low Capital Appreciation: As REIT companies pay the maximum of their profits as dividends, they may have to raise cash y issuing new stock shares or bonds to grow.

 

Tax Implications: While REITs are not bound to pay taxes, the investors need to pay tax for any dividends they receive.

 

Non-Traded REITs can be Expensive: Talking about investing in the non-traded REITs, the cost of the initial investment may be a bit high.     

 

5. Different Types of REITs to Invest In

Real Estate Investment Trusts can be fantastic ways to grow your investment portfolio but its important to know the different types of REITs. So, before we conclude, lets take a minute to discuss the most popular types of REITs

 

Equity REITs: The type of REITs that own properties as their primary business is Equity REITs. The best examples include a shopping mall and senior housing. They tend to specialize in owning certain building types including regionals malls, office buildings, apartments, resort facilities, etc.

 

Mortgage REITs: The type of REITs invest in mortgages, mortgage-related assets, and mortgage-backed securities. These companies borrow large amounts of money at short-term interest rates and purchase long-term mortgages that pay higher rates. These REITs require special analysis.

 

Hybrid REITs: A combination of equity REITs and mortgage REITs that run both real estate operations and transact in mortgage loans and but most of them are equity type. They focus on the hard asset business of real estate operations and intend to get the benefits of both with less risk.

 

Industrial REITs: Also known as logistics REITs, these companies own properties such as factories, distribution centres, and warehouses. Some of the electronic commerce giants such as Amazon are also owned by industrial REITs.   

 

Office REITs: The companies that invest in a wide variety of office properties are office REITs and they often invest in top-tier urban high-rise offices. Some of the best examples may include offices that specialize in a specific market.   

 

Residential REITs: The REITs specialize in residential properties such as apartments but some of them also invest in single-family rental properties. These companies mostly cover urban apartment buildings, student housing communities, etc.

 

Healthcare REITs: The healthcare REITs, as the name suggests, invest in healthcare real estate and they can either choose to invest in just of these or several different types. Some examples include hospitals, medical offices, senior housing, life science, etc.  

 

Retail REITs: The retail REITs can be categorized into malls, shopping centres, and net lease or freestanding. These companies have a broad retail property portfolio.  

 

Infrastructure REITs: These companies invest in big infrastructures such as communications towers, pipelines, fiber optic networks, and other infrastructures.

 

Specialty REITs: There are many other types of REITs such as data-centre REITs, diversified REITs, timberland REITS, and hospitality REITs.

 

6. The Concluding Words:

 

REITs can be great additions to your investment portfolio but you need to know the basics risks involved. They can produce steady income as well as growth when done appropriately and can also provide you with pretty impressive long-term overall returns. However, a good understanding of how REITs work is important before you get started.