What Is Real Estate Investment Trust (REIT)
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According to REITs and Real Estate Investing, Reit investing has been considered one of the best asset accumulations over the years- delivering a competitive income on investment based on the two main income sources: dividend payments and asset appreciations.
The Real Estate Investment trust ( Reit) value is currently over $3 trillion based on the real estate asset at the time of writing, which combine all types of REITs investing across the United State of America. For the Stock Exchange-listed, REIT alone’s around $2 in assets.
In this article today, the explanation of the Real Estate Investment Trust-Reit and given detail of the Trust-REIT’s Pros and Cons to give our readers a piece of overview information and knowledge to get familiar with this type of investing.
1. What is Real Estate Investment Trust- Reit
2. How does Real Estate Investment Trust work?
3. Different Types of REITs?
4. Real Estate Investment Trust’s Pros and Cons
Table of Contents
- REITs are one of the asset accumulation to provide a steady income for investors through dividends payments and asset appreciations.
- Diversify investment portfolio to weather high market volatility.
1. What is Real Estate Investment Trust- REIT
REIT- real estate investment trust is a company that solely focuses on and tasks are finding and buying potential real estate assets to generate income through the model of operating, owning, and creating mutual funds. In this case, Reit mutual funds are used for the capital investment from different investors to own and purchase real estate assets.
In particular, individuals or businesses can directly invest money in the REIT fund in order to earn a steady income through receiving steady dividend income, and asset appreciations. The most benefit of investing in a Real Estate Investment Trust (REIT) is without any hard work to find and buy, and manage properties. Instead, the REIT fund will act as your representative to do on behalf of investors by managing the property’s assets.
In addition, REITs- Real estate investment trusts have a cross range of property assets, which include many types of commercial real estate such as apartment buildings, shopping malls, hospitals, hotels, and office buildings. There are some REIT funds that actively participate in providing capital for real estate developers.
Interesting fact, real estate investment trusts- REITs are listed on the major stock exchanges as publicly registered. And, REITs have two main types including mortgage REITs and equity REITs, as will discuss in more detail later in the next section.
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2. How does Real Estate Investment Trust work?
The creation of REIT was first started in America by President Dwight D. Eisenhower back in 1960, which was called the Cigar Tax Extention. The funds are to give investors of all types investing in Reits’ shares by purchasing or financing properties in order to diversify their investment portfolios.
At the time of writing, REITs have been established in more than 39 countries, which combine assets of more than 1.7 trillion from 490 stock exchange-listed Real Estate investment firms. And those companies are listed under mutual funds, and index funds such as Global Real Estate Investment Index Series.
As mentioned earlier, the investment portfolio of REIT would cover a different cross range of assets such as apartment buildings, hospitals, hotels, office buildings, large shopping centers, and self storage, just to name a few.
For this reason, REITs mainly operate in the real estate sector by owning, operating, and managing those assets, which allow generating revenue for investors via the two main sources: dividend payment, and asset appreciations.
Importantly, retail investors and institutional investors have the right to purchase and sell a REIT stock at major stock exchanges around the world.
3. Different Types of REITs?
Moving into the next section is Types of REITs- there are three main types of Real estate investment trust -REIT, which are equity, mortgage, and hybrid REITs. In addition, the investors can purchase one of the three types of REITs listed above publicly-traded REITs, public non-traded REITs, and private REITs.
Let’s move into the detail of each type of REIT in order that you can get familiar with the asset and understand its risk, it’s vital to know before you plan to make the next move in your investment journey.
- Equity REITs– this is the first type of estate investment trust, which owns and manages directly the real estate assets. In particular, the fund normally makes money vie managing properties and collecting rent and then continues to use the surplus cash to reinvest in other real estate assets in order to generate a larger profit.
- Mortgage REITs– is a different type of REIT as the funds do not own a single piece of real estate asset. Instead, they offer to loan and mortgage money directly to real estate owners and operators. For this reason, their earning capacity mainly comes from interest fees and principal repayment. For instance, if you buy a piece of property investment through mortgage repayment, then consider REITs may be one of your mortgage lenders that collect the monthly payment from borrowers over time. Importantly, Mortgage REITs are normally considered riskier than equity REITs. In return, investors will receive higher dividends than equity REITs.
- Hybrid REITs– that are using the strategy of combining both equity and mortgage REITs. Specifically, REITs have the power to purchase and collect the money from commercial rental properties, while also can use the capital to loan and mortgage the money to the real estate developer, and owners, which allows them to make instant revenue-based interest fees repayment.
To further enhance your understanding, publicly-traded REITs, public non-trade REITS, and private REITs are the three main classifiers, which allow investors to purchase a share and keep the shares as they wish.
1. Publicly Trade REITs: will allow investors to purchase or trade on the major stock exchanges around the world- this could be done by investing in individual stocks or via ETFs depending on each individual choice and preference. Investors can purchase REITs through their brokerage accounts.
Publicly traded REITs allow the investors to purchase and sell stocks on regular trading hours basic, just like other equity assets. This is because REITs are considered liquid stocks, which investors can sell for getting receiving faster cash. Importantly, publicly-traded REITs are transparent due to the fact that it is regulated by government bodies and the security exchange commission (SEC).
2. Public Non-Traded REITs: those REITs are registered with the SEC, but are not available to trade on the stock exchange like Publicly trading REITs. For this reason, those REITs can only be purchased from a designated broker, who has the license to purchase in-public non-trade offering assets.
Importantly, Public Non-Traded REITs are normally less liquid because they are not offered publicly for trading. For this reason, they are impacted by the high market volatility.
3. Private REITs: those REITs are not registered with SEC and are not available to trade on the security stock exchanges. For this reason, it is hard to evaluate those REITs’ performance as it may not attractive to investors.
In addition, private REITs’ fees are even more expensive than publicly traded REITs because the minimum requirement for opening an account to invest is around $20,000 to $25,000, which makes it almost impossible to get access to the funds more than others. This is because private REITs target the investors, who have the larger capital and assets such as the income of at least 200,000 combined for husband and wife or current assets of over 1 million.
4. Real Estate Investment Trust-REIT’s Pros and Cons
REITs are one of the investment accumulation assets that can a vital role to balance and diversify the investment portfolio due to the fact that they can offer a steady income through dividends and asset appreciations in the long run. However, there are advantages and disadvantages of owning REITs as part of your investment assets.
Advantages of REITs- Real Estate Investment Trust
- First to mention is a diversification aspect, investing in REITs gives investors the ability to balance their portfolio to sail or smooth out the high market volatility.
- Regular dividends they payout to the investors and shareholders, around 80 to 90% of shareholders dividends. For those investors who want to create a steady income, then REITs could be considered one of the most attractive destinations to invest in.
- Investing in REITs can give a higher return on investment than an index fund, this is because REITs have been outperforming the equity index over the past years.
- REITs are liquid, which make them even more attractive to investors as they can purchase and sell REITs’ share on a regular trading hour in order to get cash quickly.
- Most REITs are transparent because they are regulated by the government body and registered with SEC, which is required to obey the security rules and regulations.
Disadvantages of REIT- Real Estate Investment Trust
- Tax burden: whenever investors or shareholders receive dividend payments from REITS, they are subject to paying tax as part of their regular income.
- Most of the REITs are low growth in terms of assets appreciations, this is because they are considered hedge funds or mutual funds, which provide a safer investment but less return for accumulating share prices (especially non-traded and private REITs)
- Non-Traded REITs are far more expensive to invest in than you thought in terms of fees and other stricter account opening requirements.
- REITs consider a higher risk of investment due to the fact that REITs contain a lot of debt. This is because they use the money to loan and mortgage the money to borrowers, which may impact the dividend payment of the borrowers’ debt default.
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By Jiro Nguyen.
The content is only based on the author’s personal opinion and experience. It is for informational purposes only and does not rely on as a comprehensive or substitute for professional advice.
Different Types of REITs
Equity REITs, Mortgage REITs, and Hybrid REITs.
What is Real Estate Investment Trust- REIT
REIT- real estate investment trust is a company that solely focuses on and tasks are to find and buy potential real estate assets to generate income through the model of operating, owning, and creating mutual funds. In this case, Reit mutual funds are used for the capital investment from different investors to own and purchase real estate assets.