Real Estate Investment Trusts (REITs) have been around for quite some time, but not many people know what they are or how they work. In this beginner’s guide, we’ll explain what REITs are, how they work, and how you can invest in them.
What are REITs?
Real Estate Investment Trusts (REITs) are companies that own or operate income-producing real estate properties. They raise capital from investors by selling shares, similar to how a public company sells its stock to investors. A REIT pools that money to buy, sell, or operate a portfolio of real estate assets.
The primary goal of a REIT is to provide investors with consistent income from the rent generated by its properties. They are similar to mutual funds in that they give investors access to a diverse range of properties without having to buy them individually. REITs are required by law to distribute at least 90% of their taxable earnings to shareholders in the form of dividends.
How do REITs work?
REITs function like operating companies that own and operate commercial real estate properties, such as shopping centers, offices, apartments, and hotels. They generate revenue from rent collected from tenants and other ancillary sources of income, like vending machines and parking fees.
REITs have different structures. Some own physical properties, while others function like investment managers, investing in mortgages or other types of real estate securities. Regardless of their structure, REITs are designed to provide investors with consistent returns from their real estate investments.
Benefits of investing in REITs
One of the biggest benefits of investing in REITs is that you don’t need a lot of money to get started. Unlike individual real estate investments, REITs are accessible to investors with relatively small amounts of capital.
Another benefit of investing in REITs is that they offer liquidity. Because they are publicly traded, investors can buy and sell shares of REITs on stock exchanges during regular market hours. This means that you can quickly and easily sell your REIT shares if you need cash.
Finally, REITs provide investors with a steady stream of income from the rental income generated by the properties they own. As we mentioned earlier, REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
Risks of investing in REITs
Like all investments, there are risks associated with investing in REITs. The value of a REIT’s shares can fluctuate based on market conditions, and the rental income generated by the properties they own is subject to economic conditions.
Additionally, individual REITs may not be diversified enough to protect investors from certain types of risks. For example, a REIT that specializes in shopping centers might have a higher risk of losses if consumer spending decreases.
How to invest in REITs
Investing in REITs is relatively easy. You can invest in REITs by buying individual shares of publicly traded REITs on the stock market, or through an exchange-traded fund (ETF) that invests in a portfolio of REITs.
If you decide to invest in REITs, it’s essential to research the different REITs available to you. Look at their track records and how diversified their portfolios are. Seek advice from a financial advisor or broker to help you navigate through the REITs’ intricacies.
REITs offer a practical way to invest in commercial real estate properties without needing a significant amount of money. As with all investments, there are risks associated with investing in REITs, but they offer potential for steady income and can provide portfolio diversification. If you’re looking to invest in REITs, do your research, and consult with a financial advisor to determine what works for you.