Investment has many faces, not the least of which is the use of incomprehensible terms, abbreviations, and sometimes the maze of meanings through which one has to pass to get to the other side. One of the commonly used phrases in this complicated area is Real Estate Investment Trust, or simply REIT.
But what does this term actually mean? Do they offer the investor a way of getting involved in projects that are typically only accessible to large developers? Besides these, are there other types of REITs that an investor-to-be is advised to look into?
This blog visits the underbelly of the world of REITs, and we will explore different angles on this subject. We will reveal how these investment tools can be a game changer in your portfolio and may even bring you to a place where you had no idea you wanted to go before. Come with me on this excellent and informative trip inside the world of real estate investment trusts.
What is a Real Estate Investment Trust?
A Real Estate Investment Trust (REIT) is a company that covers, administrates, or finances income-generating real estate in different sectors, including residential, commercial, industrial, or healthcare properties.
Real Estate Investment Trusts (REITs) were first launched in the United States in 1960. They allowed the common man to invest in real estate without the need to buy, manage, and finance properties directly.
Like mutual funds, Real Estate Investment Trusts (REITs) gather money from several investors to invest in a portfolio of properties or real estate-related assets. The funds are generated mainly through rents, leases, or interest payments on real estate-secured loans.
Types of REITs 1. Equity REIT
Equity REITs are investment entities that buy and manage properties that generate income. Their major income source is the rent paid by the tenants.
When it comes to real estate investment, Equity REITs are characterized by their direct ownership and management of various commercial real estate assets, including shopping malls, office buildings, residential apartments, and hotels.
In addition to such performance, they need to obtain long-term leases to help them create a strong and reliable income stream.
Equity REITs' performance and popularity are intertwined with the general health of the real estate market and the efficiency of the properties they own in maintaining high occupancy levels. Equally, the main selling points for these vehicles are stability, high dividends, and property value appreciation in a buoyant economy. 2. Mortgage REITs
A Mortgage REIT primarily supplies finance to real estate owners and operators. This is usually done either directly through mortgages provided or loans made to operators or indirectly via investments in mortgage-backed securities.
While mortgage REITs are primarily aimed at the financial aspects of real estate, unlike equity REITs, which invest in physical properties, they invest in mortgages or mortgage-backed securities, earning their income by earning interest on these financial assets.
The most attractive trait of mortgage REITs is their tendency to have high dividend yields since their major sources of revenue would still be interest payments from mortgage loans.
However, this, combined with the uncertainty of interest rates, means that a higher risk may be taken whenever returns are decent. An advantage here is that there will be marked attention from the investors who guess the rise or fall of the interest rates ahead of their time and do not unwearyingly retreat the riskiest investment. 3. Hybrid REITs
Hybrid REITs describe an investment strategy that combines the methodologies of equity REITs and mortgage REITs. They gain exposure by accepting and investing in mortgage loans, which broadens their base of income.
Financial leverage, combined with a broad array of mortgage investments, will also help reduce the risk involved in direct real estate investment.
The hybridity thus allows a dual mechanism of changing the portfolio allocation depending on the condition, which results in a combination of a risk-reward profile that is balanced at best and not the outlying nature of pure equity or pure mortgage REITs.
They excite the interest of investors who want exposure to appreciation and interest earnings. However, perhaps hybrid is also synonymous with the complexity and risk of having different asset types under one roof.
How do REITs work?
Real Estate Investment Trusts (REITs) represent a simple investment method for investing in real estate. You can purchase units of REITs in a manner similar to buying shares of any public corporation. With a REIT, you effectively own a small percentage of the properties that the trust holds.
REITs pay dividends, and they are classified as such because to be classified as a REIT, a company must set aside at least 90% of its taxable income for dividends to shareholders, thus rendering them terribly inviting to income-seeking investors.
Opposite length and complexity is the point of view that REITs are also transparent and public. Almost the overwhelming majority are publicly listed and, therefore, have to issue quarterly and annual reports. This allows investors to find and foot-stamp the requisite information regarding the trust fairly easily.
Why Invest in REITs?
Real Estate Investment Trusts have a demonstrable history of delivering respectable total returns, mainly via solid and frequent dividends as well as long-term capital appreciation. REITs have relatively low correlations with other asset classes and are therefore legitimate candidates for effective portfolio diversification.
It thus stands to lessen the entire risk of a portfolio while still obtaining an enhancement in returns. These qualities provide motivation for investing within REITs as an investment strategy.
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