Real estate investment trust – complete guide to REITs

There are many ways to invest in properties, and a real estate investment trust might be one of the best ways to do it. The fund allows you to diversify with ease since the REIT’s investors will do it for you. What’s more, you have a wide range of options for your first REIT. But why should you choose it over investing in individual properties?

Let’s say you bought a rental property so the monthly payments from tenants may serve as your cash flow. As the owner, you’re in charge of managing repairs and dealing with tenants. These could easily reduce the money you can make from the investment. On the other hand, a real estate investment trust spares you from these hassles.

The trust is responsible for investing your money into the most promising properties. The law requires them to provide passive income for investors. In other words, they manage the properties for you while you reap the benefits! Of course, you should know all you can about real estate investment trusts before going all in.

What is a real estate investment trust?

A real estate investment trust (REIT) is a company that lets individuals invest in large-scale and profitable real estate assets. Each one specializes in different types of properties.

For example, a REIT may invest in apartments, resorts, and others in the real estate market, and another might focus only on commercial real estate and nothing else.

Unlike other real estate firms, a real estate investment fund does not develop properties to sell them later. Instead, a REIT invests by purchasing them as part of its portfolio.

A company must meet certain requirements so it can qualify as a REIT.

The following are the criteria set by the US Securities and Exchange Commission (SEC):

• Most of its income and assets must link to real estate investments.
• At least 90% of its taxable income should be distributed among shareholders.
• There should be a board of directors that manage this company.
• The shares must be fully transferable.
• It should at least have a minimum of 100 shareholders after its 1st year as a REIT.
• Five or fewer people should hold more than 50%
• The company should invest at least 75% of its assets in cash and real estate.
• It must also get at least 75% of its income from sources connected to real estate, and these may include rent or mortgage interest.
• The firm should get at least 95% of its gross income from real estate sources. What’s more, it must receive dividends from other sources.
• No more than 25% of its assets in non-qualifying securities should be in taxable REIT subsidiaries.

Read More: Investing For Dummies 101

What are the types of real estate investment trusts?

You may choose from numerous types of REITs. Let’s start with how they’re traded. Learn about the available choices below:

• Publicly traded REITs – You may buy and sell these at the major stock exchanges.
• Non-exchange traded REITs – As the name suggests, you can’t get these from stock exchanges.
• Private REITs – These are more exclusive than the previous two, and you can’t get them from stock exchanges, and the REIT’s board of directors decide who can invest.

What’s more, you may classify them according to the types of properties they contain.

As we said, they could focus on a specific type or several:

• Mortgage REITs – These real estate investment trusts focus on residential assets, such as apartments. They could narrow down their focus even further. For example, a REIT might only invest in student housing.
• Equity REITs – These companies buy, own, and manage income-producing properties like malls and office buildings. They’re usually the best for long-term investing because they earn capital gains and dividend yields.
• Retail REITs – These contain properties like malls and shopping centers.
• Healthcare REITs – These REITs invest in hospital buildings, medical offices, and other medical facilities.
• Infrastructure REITs – These may include fiber cables, data centers, and cell towers.
• Diversified REITs – Unlike the previous types, these can contain numerous types of properties. For example, it could invest in malls and rental spaces.

What are the benefits and risks of REITs?

The potentially low risk and high rewards may have convinced you to invest. That’s not all you get from an investment in real estate investment trusts, though:

• Reduced risk – A REIT contains various assets, and if one does poorly, the others could make up for it.
• Dividends – As we said, REITS must give at least 90% of their earnings as dividends, and they may even decide to give more. This could be a great way to earn passive income.
• No corporate tax – Unlike other companies, REITs don’t have to pay this. As a result, you could get a higher payout from them.
• Easy to buy and sell – These work like stocks because you can buy them from exchanges. If you want to get rid of them, you can easily sell them too.

Of course, this asset has some downsides.

Learn more about them, so you can see if a real estate investment trust is right for your portfolio:

• Dividend taxes – Hold on, we just said that the dividends for REITs are great, right? Well, those firms may have zero corporate tax, but you might. They usually don’t qualify for the capital gains rate so that the taxes could reach a person’s average income!
• Shifts with interest rates – It’s often a good idea to invest in REITs when interest rates are low. When the rates go up, though, they’re likely to drop in value.
• Trends have a huge impact – We said that REITs often specialize in certain types of properties; however, their price can go up and down depending on current trends. Let’s say you invested in REITs that focus on malls. Since most people don’t go to malls because of the COVID-19 pandemic, they’re likely to go down in value.
• Best for long-term investment – You may have to wait at least five years to get the most out of your total returns. If you want to profit a lot faster, you might want to check other options. For example, you might want to invest in real estate funds or crowdfunding.

Final thoughts

Note that this article is intended to inform people about real estate investment trusts. Whether you will invest in REITs or not is up to you, and check assets before investing.

You don’t have to limit yourself to real estate. There are so many other options out there, such as stocks, bonds, and mutual funds. You don’t even have to invest in physical properties!

There are two ways of investing in digital real estate. You may buy websites and domain names to sell them for profit, or you could buy properties in the virtual space!

Disclaimer: This article is not the official guide to the REIT process but is based on the author’s research or own personal experience.