Real estate is a thriving business industry. It prospers based on the scarcity of land and the growing need for commercial, residential, and industrial spaces. Real Estate investing is recognized as a major way to multiply money and secure one's future. Yet, there is only limited knowledge of the various real estate investment opportunities available. One of which is the Real Estate Investment Trusts (REITS).
When most people hear the term "real estate investment", what comes to their minds is becoming a landlord and renting housing units for profit. However, this is just one type of real estate investment. There are many other ways to invest in real estate. Some of them come without the hassle of purchasing, managing, and financing a landed property.
One of these key ways is through Real Estate Investment Trusts (REITs). This article will expose you to the different types of REITs and how to invest in one.
What is Real Estate Investment Trust (REITs)
REITs are companies that manage, and finance income-generating real estate. It functions as an investment company. They do this by allowing individuals to own a fragment of a housing property. Dividends-based profit is then paid by RIETs to the individuals.
These REITs companies solely manage the real estate and oversee the income generation aspect of the investment. They do this while they distribute the dividends among shareholders. They serve as a good way to own real estate without actually buying and managing a property or building one.
How Does REITs Works
Like every other company that sells their shares, REITs work based on equal revenue sharing. They purchase or build commercial spaces by selling units or shares of the property capital to interested buyers. These commercial properties are thereafter leased to interested occupants. The rent paid is then distributed to shareholders as dividends.
The profit sharing could be 90% and some even pay up to 100%. REITs are a common investment option in the US and account for $4 billion of landed assets by Americans. The safety of investment and low risks are factors that contribute to its high demand.
What are the Types of REITs
Real Estate Investment Trusts are majorly grouped into three types depending on the type of property they invest in.
Equity REITs
These companies purchase, finance, and manage housing properties that are rented. They could be commercial, residential, or industrial units that are leased to individuals and companies. The sole purpose is to make profits.
Equity REITs invest in every type of commercial space;
- Medical facilities
- Restaurants,
- Apartment buildings
- Office spaces
- Warehouses
- Hotels
- Cell towers
- Data centers, etc.
The shareholders earn their profits by receiving dividends collected as rents from the occupants.
Mortgage REITs
As implied, these firms provide mortgages to real estate developers. These REITs generate profit by the interest incurred on the loans they provide. This is equally shared among contributors as dividends. Mortgage REITs leverage on the rising interest rate to ensure increasing profit generation.
Hybrid REITs
These types of REITs combine the strategies of both equity and mortgage firms to generate profit.
Generally, most REITs pay up to 90-100% of the realized taxable income to investors. This has made it a top investment choice among citizens from all walks of life.
What Qualifies a Company as a REIT?
Every company that claims to be REITs must meet the requirements laid out by the Internal Revenue Service (IRS). Before investing in a company that claims to be a REIT, ensure they are fully compliant. A REIT must:
- Invest at least 75% of their assets in real estate.
- Generate at least 75% of their income from rents, interest, or loans that finance estates.
- Have no less than 100 shareholders.
- Have no more than five people own less than or 50% of its shares
- Be a taxable corporation
- Be managed by a board of trustees
- Distribute at least 90% of their taxable income as dividends to their shareholders.
Tips on How to Invest in REITs
Before selecting a REIT to invest in, consider:
- Consult a broker, financial planner, or investment advisor to help analyze your investment capacity and recommend desirable trust opportunities to you.
- Looking at industry trends to determine what type of REIT is best for investing because not all firms are good investment options. For example, a REIT that deals majorly in office spaces can experience a high decline in sales due to the heavy evolution to remote work settings. Virtual work modes, in this case, can pose a major risk in this type of REIT.
- Choosing a REIT with good managerial ability. A way to identify one is to observe the buildings they manage and what they do to maintain them. This ensures a low tenant turnover, more rental power, and a consistent inflow of income.
Risks in REITs
The investment turnover and high demand for landing properties can appear irresistible. Yet, REITs do not come without their risks. Some of them are:
Fraudulent Firms
Investors may encounter fraudulent persons and companies posing as REITs. Falling into these deceits can lead to trauma. Avoiding such negative experiences starts with choosing only registered REITs. This can be done by using the SEC's DEGAR tool.
Unprofitable Investment Choice
Trends affect the profit margins of real estate. The evolving choice of the masses is a key indicator of profitable opportunities for REITs investments. Millennials, for example, prefer energy-saving and cost-effective homes to luxury-themed apartments.
Investing in a location-based REITs that specializes in the latter can be a bad choice in this case. A keen attention to the trend can inform you on which REIT option is best to invest in.
Taxes
REITs are not as tax-friendly as other investment options. REITs dividends are taxed at the same rate as ordinary income which is higher than the typical dividend rates.
Are REITs Worth Investing In?
REITs are better investment options as they perform well in the long term. This is true based on historical comparison with other stock options. Also, many REITS have a track record of increasing dividends paid. The increase is because of the consistent increases in rent fees, mortgage interests, and rising demand for commercial spaces.
Real estate investment trusts are also a more liquid form of real estate than owning a property. Shares can be easily converted to money by simply logging into one's brokerage account and selling to a broker. Plus, most brokers do not demand commission so the real value of one's shares can be retained.
Conclusion
REITs are one form of real estate investment not commonly known by many. By affording individuals the opportunity to claim ownership of landed properties, they provide a sense of security. Its flexibility in division encourages individuals with varying budget sizes. They can own an extra source of income and improve the economy of a nation.
Paying attention to the trend, SEC compliance and managerial ability of a REIT can help interested investors make near-perfect decisions and experience the profitability that they desire.
