Real Estate Investment Trust(REIT): Brief Discussion

A Real Estate Investment Trust, commonly referred to as a REIT, is a financial entity structured as a partnership, corporation, trust, or association, with the primary purpose of investing in real estate. REITs offer shares to the public, which are traded on stock exchanges, similar to regular stocks. 

It can be a good way to invest in real estate without having to buy, manage, or finance properties yourself. They are also a relatively liquid investment that can be easily bought and sold. To qualify as a REIT, a company must meet certain requirements. 

Now you may want to know how it works, this blog is going to share a brief discussion on REIT and its types,  pros, and cons. So scroll down!

What Is a Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) functions as a firm that manages income-generating real estate. It is similar to the structure of mutual funds. By aggregating funds from multiple investors, REITs enable individuals to receive real estate investment dividends, eliminating the need for them to directly purchase, oversee, or provide financing for properties.

To qualify as a REIT, the company is required to allocate a minimum of 75% of its assets to real estate investments and generate at least 75% of its income from activities related to real estate.

REITs: How Does It Work?

A REIT portfolio can encompass a diverse range of properties, such as apartment complexes, data centres, healthcare facilities, hotels, infrastructure like fibre cables, cell towers, energy pipelines, office buildings, retail centres, self-storage facilities, timberland, and warehouses.

In general, REITs specialize in a specific real estate sector. However, diversified and speciality REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties. 

Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. These REITs typically trade under substantial volume and are considered very liquid instruments. 

Types of REITs

There are two main types of REITs: equity REITs and mortgage REITs.

1. Equity REITs 

Its owns and operates income-producing real estate. They generate income from rent and from sales of properties. Equity REITs can be further classified by the type of real estate they invest in, such as:

• Apartment REITs own and operate apartment buildings.
• Data centre REITs own and operate data centres, which are facilities that house computer systems and other IT equipment.
• Healthcare REITs own and operate healthcare facilities, such as hospitals, nursing homes, and medical office buildings.
• Hotel REITs own and operate hotels.
• Industrial REITs own and operate industrial properties, such as warehouses and manufacturing facilities.
• Office REITs own and operate office buildings.
• Retail REITs own and operate retail centres, such as shopping malls and strip centres.
• Storage REITs own and operate self-storage facilities.
• Timberland REITs own and manage timberland resources.

2. Mortgage REITs 

They do not own or operate real estate directly. Instead, they invest in mortgages or mortgage-backed securities. Mortgage REITs generate income from the interest on these investments.

In addition to equity REITs and mortgage REITs, there are also other types of REITs, called Hybrid REITs, such as,

• Public non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges.
• Private REITs are not registered with the SEC and are only available to accredited investors.

How to Invest in REITs

You can invest in publicly traded Real Estate Investment Trusts (REITs), as well as REIT mutual funds and REIT Exchange-Traded Funds (ETFs), by acquiring shares through a brokerage account. Alternatively, you can purchase shares of a non-traded REIT through a broker or financial advisor who is involved in the offering of that specific non-traded REIT.

However, if you want to get detailed guidance, you can contact Srijan Realty to have a discussion with experts and get the best guidance on REIT. Before going back, let’s check the benefits and drawbacks of REIT.

Pros and Cons of Investing in REITs

Let’s take a look at the pros and cons of investing money in REITs.

Pros:

1. Real estate investment trusts (REITs) hold significance in an investment portfolio due to their ability to provide a consistent and reliable annual dividend along with the opportunity for sustained growth in capital value over the long term.
   
2. In terms of performance, REITs present appealing risk-adjusted gains and a reliable stream of cash flow. Furthermore, having real estate investments in a portfolio can be beneficial as it offers diversification and a source of income through dividends.

Cons:

1. REITs typically don’t provide significant opportunities for capital appreciation because, by design, they are required to distribute 90% of their earnings to shareholders. This means that only a limited 10% of their taxable income can be retained for reinvestment in acquiring new assets.
   
2. Other drawbacks include the fact that REIT dividends are subject to standard income tax rates, and certain REITs come with elevated management and transaction costs.

Final Words

When you want to invest in REIT, it’s vital to keep several factors in mind. First and foremost, thorough research is imperative, given the diverse array of REIT options available. Additionally, due to the potential volatility of REIT investments, it’s wise to regularly rebalance your portfolio. 

This practice ensures that your asset allocation remains in harmony with your long-term investment goals that help you navigate the ever-evolving landscape of REITs more effectively. Apart from this, Srijan Realty is here to help you out and give you a proper path.