Individuals can engage in large-scale, income-producing real estate investments through real estate investment trusts (REITs). These are firms that own and operate income-producing real estate or associated assets. Office buildings, shopping malls, flats, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans are examples of these properties. Unlike other real estate businesses, a REIT does not build properties to resell them. On the other hand, REITs purchases and develops properties largely to operate them as part of their investment portfolio.

How Do REITs Make Money?

Most REITs follow a simple and easy-to-understand business model. The firm makes income by leasing space and collecting rent on its real estate, which is distributed to shareholders as dividends. REITs must pay out at least 90% of their taxable income to shareholders, with the majority paying out 100%. Dividends are paid to shareholders, who then pay income taxes on them. mREITs (or mortgage REITs) do not own real estate; instead, they finance it and profit from the interest on their assets. Like mutual funds, REITs aggregate many different investors’ money. Individual investors can now profit from real estate investments without owning, managing, or financing any of the properties by themselves.

Three Types of REITs:

  1. Equity REITs: The majority of REITs are equity REITs, which own and operate income-generating properties. Rents are the primary source of revenue (not by reselling properties).
  2. Mortgage REITs: Mortgage REITs provide money to real estate owners and operators directly or indirectly by purchasing mortgage-backed securities. The net interest margin—the difference between their income on mortgage loans and the cost of funding these loans—is their main source of profits. Because of this approach, they are susceptible to interest rate hikes.
  3. Hybrid REITs: These REITs combine equity and mortgage REIT investment strategies.

Many REITs are registered with the Securities and Exchange Commission (SEC) and are traded on a stock exchange. These are known as publicly-traded real estate investment trusts (REITs). Others may be registered with the Securities and Exchange Commission (SEC), but they are not publicly traded. These are called Non-traded REITs (also known as non-exchange traded REITs). Before investing in a REIT, make sure you know if it’s publicly traded or not, and how that can influence the benefits and risks, you may encounter.

How to Invest in REITs

By purchasing shares through a broker, you can invest in publicly-traded REITs, REIT mutual funds, and REIT exchange-traded funds (ETFs). A broker or financial advisor participating in the non-traded REIT’s offering can sell you shares of the non-traded REIT. A rising number of defined-benefit and defined-contribution investment plans contain REITs. According to Nareit, a Washington, D.C.-based REIT research organization, an estimated 145 million US individuals own REITs directly or through their retirement savings and other investment vehicles. 

Private REITs are a little more difficult to understand. They are usually only available to institutional and accredited investors who can access the funds directly or through private networks. They also have substantially greater minimum investment requirements and are more difficult to sell.

Why Invest in REITs?

REITs have typically provided total competitive returns through high, consistent dividend income and long-term capital growth. Their low connection with other assets makes them an effective portfolio diversifier, helping lower total portfolio risk while increasing returns. Individual investors can participate in the revenue generated by commercial real estate ownership through REITs, without purchasing the property themselves. 

What Are the Risks of Investing in REITs?

Investing in REITs also comes with some drawbacks. There are inherent dangers, particularly with REITs that are not quoted on a stock exchange. Non-traded REITs have unique risks because they are not traded on a stock exchange. They include the following:

  • Lack of Liquidity: Non-traded real estate investment trusts (REITs) are illiquid investments. They are often difficult to sell on the open market. You may be unable to sell shares of a non-traded REIT to raise money quickly if you need to sell an asset.
  • Share Value Transparency: Determining the value of a non-traded REIT’s share might be tricky. Non-traded REITs usually don’t estimate their share value until 18 months following their initial public offering. 
  • Conflicts of Interest: Instead of using their own workers, non-traded REITs usually hire an outside manager. This may result in potential shareholder conflicts of interest.

Wrapping Up

Please note that there is nothing like the best time for buying or selling any stocks, including REITs. Therefore, you should always make informed decision before buying or selling REITs. The good thing is that this article provides readers with all the information they need about REITs under one roof.


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