Real Estate Investment Trust (REIT): An Introduction To A Lucrative Investment Option
Introduction
Real Estate Investment Trusts (REITs) have gained popularity among investors seeking exposure to the real estate market without directly owning and managing properties. In this article, we will explore the concept of REITs, their benefits, and how they function as an investment option.
What is a REIT?
Definition And Structure
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate. It functions as a vehicle for investors to pool their funds and invest in a professionally managed portfolio of real estate properties across different sectors, such as residential, commercial, or industrial.
To qualify as a REIT, the company must meet specific requirements laid out by tax laws. One of these requirements is that at least 90% of its taxable income must be distributed among shareholders as dividends. This unique structure allows investors to access real estate markets traditionally reserved for institutional investors or wealthy individuals.
Types Of REITs
There are several types of REITs, each specializing in different real estate sectors. These include:
1. Equity REITs: These REITs invest in and own income-generating properties, such as apartment buildings, shopping centers, office buildings, or industrial warehouses. They generate revenue through rental income and capital appreciation.
2. Mortgage REITs: Unlike equity REITs, mortgage REITs primarily invest in mortgage loans rather than physical properties. Their income is generated from the interest earned on these loans or mortgage-backed securities.
3. Hybrid REITs: As the name suggests, hybrid REITs combine elements of both equity REITs and mortgage REITs. They own and operate properties while also investing in mortgage loans.
Benefits Of Investing In REITs
Diversification And Liquidity
REITs offer investors the opportunity to diversify their portfolios beyond traditional stocks and bonds. Investing in real estate through REITs allows individuals to gain exposure to a range of property types and geographic locations, spreading the risk. Additionally, unlike direct investment in real estate, REITs provide superior liquidity, as investors can buy and sell shares on major stock exchanges.
Steady Income And Potential Capital Appreciation
REITs are known for their income-producing nature, as they are required to distribute a significant portion of their earnings as dividends. These dividends can provide investors with a steady stream of income, making REITs an attractive option for those seeking regular cash flow. Furthermore, REITs have the potential for capital appreciation over time, as the value of the underlying real estate assets increases.
Professional Management And Accessibility
Investing in REITs eliminates the need for individuals to personally manage properties, deal with tenants, or handle maintenance issues. REITs are managed by seasoned real estate professionals who handle property operations and strategic decision-making. This professional management allows investors to benefit from the expertise and experience of industry specialists. Additionally, REITs are accessible to individual investors with varying budget sizes, providing them with an easy entry into the real estate market.
Conclusion
Real Estate Investment Trusts (REITs) offer an attractive investment alternative for individuals seeking exposure to the real estate market. REITs provide benefits such as diversification, liquidity, steady income, and potential capital appreciation. By investing in REITs, individuals can access professionally managed portfolios of income-generating real estate properties, without the challenges and responsibilities of direct property ownership. As with any investment, it is important to conduct thorough research, consider risk factors, and consult with financial advisors to determine the suitability of REITs within your investment portfolio.
What Is A Real Estate Investment Trust?
According to the U.S. Securities and Exchange Commission, a real estate investment trust, or REIT, allows individuals or business entities to invest in large real estate projects that will eventually generate income. The REIT is a company itself and usually handles the real estate that is generating the profit and/or the assets of the real estate.
Common Examples Of A REIT
A REIT will not develop a property and sell it to make property. The REIT will instead buy, develop, and operate the property in order to generate profit in the future and improve its investment portfolio. Common examples of a REIT property or assets include the following:
· office buildings
· apartments, hotels, and resorts
· shopping malls
· storage facilities
· warehouses
· mortgages and loans
If an REIT is registered under the Securities and Exchange Commission and publicly trades its stock, it is known as a publicly traded REIT. If the REIT is not publicly traded, it is referred to as a non-traded REIT.
Risks Involved With A Real Estate Investment Trust
REITs are attractive because they usually bring in more dividend that other investment opportunities. There are risks though. Common risks involve the following:
1. Few Liquidity Options: a non-traded REIT is hard to sell. If the company needs to sell an asset to make money in a short amount of time, an REIT is not a good option.
2. Value of the Share: the share value of a publicly traded REIT is transparent, but it’s difficult to prove the value of a share for a non-traded REIT. A non-traded REIT does not need to offer the estimated value per share until 18 months after the offering closed. Investors for an REIT may not receive the value of the non-traded share for years.
3. Distributions: a non-traded REIT will usually make distributions to investors before funds from operations have allowed the REIT to make such distributions. The distributions are usually offered with a combination of proceeds and borrowings, which decreases the value of the non-traded share.
4. Conflicting Interests: a non-traded REIT will normally have an outside manager instead of one of the employees. In some cases, the shareholders may disagree on the fees for the external manager.
Fees And Taxes Associated With A Real Estate Investment Trust
An REIT is required to pay at least 100 percent of its taxable income to the shareholders. The shareholders are then taxed on the amount of dividends and capital gains they receive from their investment. REIT dividends are treated as ordinary income and are not eligible for tax exemptions like other types of corporate dividends.
If the REIT is publicly traded, an investor can buy common stock, preferred stock, and debt security. A broker can buy these stock options for an investors as well, and broker fees will apply. A non-traded REIT usually requires an upfront offering fee of about 10 percent of the whole investment—which lowers the value of the investment in total.
