An REIT, or Real Estate Investment Trust, is a company that facilitates investment in income-producing real estate. REITs are an industry standard investing channel and must meet certain guidelines to operate as an REIT.
Because of the offered stability, track record of high payouts, and potential for growth associated with REITs, they are one of the most popular classes of stock today.
REITs operate by the pooling of investor funds for investing in a collection of assets – largely commercial properties, though there are other types of assets. These investments generate profits which are then paid out to shareholders as dividends.
You can see that REITs operate similarly to a traditional mutual funds– except they operate by investing in real estate instead of stocks or bonds.
In this guide, we will help you better understand REITs and identify the viability of investing for your personal situation.
It should be noted, that REITs can be purchased through a brokerage account just like traditional stock and that purchasing of an REIT should be given the same level of forethought and care you and your financial advisor would give any stock purchase.
3 Types of REIT on the Market Today
There are three types of existing REIT today.
- Equity REIT
- Mortgage REIT
- Hybrid REIT
Each REIT type has a different level of risk and a differentpotential for investment growth.However, not all will be the right choice for each investor’s situation.
1. Equity REIT
Equity REITs comprise the majority of the REIT class of stock. These trusts own and manage properties and are typically specialized by industry.
For example, REITs invest in: apartment buildings, single-family homes, retail buildings, healthcare properties, self-storage facilities, office centers, and more.
An equity REIT turns a profit through the selling and leasing of those properties to tenants. Commercial property values tend to increase over time, and as such, shareholder’s dividends will likely grow the longer the investment is held.
Additionally, as property values increase, so does a business’ ability to make a profit. Equity REITs are required to distribute 90 percent, at minimum, of the portfolio’s income to its shareholders, so there is serious potential for passive income in equity REITs and it can be reasonably expected that the amount of income will increase over time.
2. Mortgage REITs
Mortgage REITs are a sparsely-considered way to invest in real estate. Profits are earned in a less-direct way and conditions are more volatile than in an equity REIT, but a mortgage REIT investment has potential nonetheless.
Mortgage REIT companies loan money to owners and operators of residential properties for mortgages. Earnings for a mortgage REIT are earned primarily through margins. Any leftover funds, after the cost of funding the loans, from the interest earned is considered a profit and is distributed as dividends.
Because of this model, real estate interest rate shifts have a significant impact on profit margins.
3. Hybrid REITs
As you likely guessed, a hybrid REIT is a company that invests shareholder principal in both real estate properties and mortgages. In a hybrid REIT it is uncommon that the diversification of the portfolio is a 50/50 split in terms of type of investment – or even close.
It is also common for profits from hybrid REITs, regardless of how principal is invested, to come largely from one type of investment – either equity or mortgages.
Should You Invest in a REIT?
Asking yourself whether or not you should invest in a REIT is too broad of a question. You must take a look at your current investing portfolio and determine if an equity, mortgage or even a hybrid REIT have anything to add, in terms of strength, to your portfolio.
Equity and mortgage REITs are quite different both in operation and in investing function.
Equity REITs are fairly secure in terms of real estate investment risk. Companies that invest in real estate properties have made profitability a science. And, given a reliable customer or client base, will be able to do so for an indefinite amount of time.
Mortgage REITs on the other hand are not as secure but can pay out higher dividends. Mortgage REITs carry a higher real estate investment risk than their equity REIT counterparts for two reasons – the effect that interest rate increases have on profits, and the fact that the company does not typically own or operate the property being invested in.
The Bottom Line on REITs
Investing in an REIT can be a very profitable investment. However, not all types of real estate investment will be right for you.
Instead of playing games of chance with your assets, reach out to an expert who can guide you through.