Definition:
Real estate investment trusts own and manage various forms of real estate providing shareholders with access to real estate without purchasing it.
What is a REIT?
These are corporations that own property on behalf of their shareholders/investors.
Investors like REITs because they offer a diverse approach to real estate ownership, with each REIT shareholder owning a unique property. REITs, on the other hand, differ from other investments because there are several rules investors should follow.
Different types of REIT
There are four main types of REIT:
- Equity
- Mortgage
- Private
- Public non-listed
Almost all real estate investment funds are classified as stocks since they are often listed on the stock exchange and generate income through rent. That is why they fall into “equity”.
Mortgage REITs, on the other hand, earn on the property’s financing and debt. Mortgage interest payments will be the source of revenue for these trusts.
Private real estate investment funds seek the institutional market. Because they are directed at accredited investors, they do not require Securities and Exchange Commission registration or approval (people or businesses who have the opportunity to trade certain securities that may not be regulated).
Public non-listed REITs are not traded on a stock exchange. Typically, investors gain access to these types of real estate investment funds from a financial consultant or another agent.
REIT criterias
Several conditions must be completed before a real estate operator may qualify for a REIT.
Shareholder base: The firm must have more than 100 shareholders, with no more than 5 depositors owning 50% of the shares. A business must have a fixed number of controlling stakeholders in order to qualify as a REIT.
Fully invested: 75% of the overall investment pool must be involved in real estate, with rent accounting for the same amount of revenue.
Dividend happy: 90% of the REIT’s profits should be paid to shareholders.
Structure: REITs are only available to taxable firms and corporations.
Management Board: The business must have a working board of directors with a set number of directors.
Advantages & disadvantages of REITs
The most important benefits are:
Flexibility: Apart from traditional ownership, several REITs may be purchased and sold on the stock market within a day, and cash can be obtained within three days. We actually mean liquidity while speaking about flexibility.
Higher payout percentage: In order to be considered as a REIT, a corporation must follow the payout rule, which states that 90% of income must be delivered to shareholders.
Diversification of property: A shareholder can get access to many sorts of property, such as commercial, medical, and infrastructural.
Some of the drawbacks of participating in a REIT are as follows:
Minimal tax advantages: Dividend payments are counted as income. Long-term gains are generally taxed at a lower rate than income.
The 90% rule: While this is a benefit, it may also be detrimental and limit progress. Because REITs must disperse the majority of their earnings, the capital given to new programs or investments is restricted.
Fees: It is an essential component of the REIT ecosystem. Fees may be greater than those charged for other investments.
How to invest in REIT
Investing in equity or mortgage REITs is an easy procedure because they are traded on the NYSE, Nasdaq, and other serious trading platforms. If the investor has shares in these firms on the application deadline, they will be paid dividends. Non-listed trusts, on the other hand, are difficult to obtain, and most investors must apply through a financial consultant or broker.
Investing in houses or in REIT: the best strategy
It is important to understand that they differ from one another. Buying and holding a property, for instance a house, usually carries a high level of risk. This means that the owner will be unable to compensate for changing market conditions.
The amount of investment choices available contrasts house ownership from a REIT. REITs allow investors to obtain access to many forms of property, such as commercial property, infrastructural facilities, hospitals, and so on.
Another consideration in comparison is liquidity. If an investor wants to sell his shares in an equity or mortgage REIT, he can do so through his brokerage account. The entire procedure, from start to finish, might take several days. And selling a property may take weeks, if not months, and can be costly when the agent’s fee and other costs related with preparing the house for sale are included in.