A REIT, or a real estate investment trust, is a company who owns and/or manages valuable income-producing real estate or finances mortgages or mortgage-backed securities. This type of trust offers investors opportunities to own a share of the valuable real estate or finance in exchange for potential dividend income, total return, and capital appreciation.
An example of a REIT may be the purchase and oversee of a large apartment complex in an urban setting. REIT investors earn money from their share in REIT much like they would by investing in stocks; investors purchase a share of the REIT company from a public or private market (traded or non-traded), earning a share of the REIT’s rental income in the form of dividends and, hopefully, capital appreciation over time.
Different Types of REITs
While there are several various REIT sectors, there are two main categories:
These REITs are perhaps the most known, owning and/or managing properties and opening shares up to investors. They make money from tenants who rent their space, and investors receive a share of the rental income. There are various specializations of equity REITs, including the following:
- Residential REIT (e.g. apartment complexes, etc.)
- Office REIT (e.g. office park, high rise office tower, etc.)
- Industrial REIT (e.g. warehouse, factory, etc.)
- Healthcare REIT (e.g. hospital, medical center, nursing home, etc.)
- Retail REIT (e.g. mall shopping center, retail plaza, etc.)
These are mortgage REITs, and these companies focus their real estate investments in financing mortgages or mortgage-backed securities, often by purchasing mortgage debts from other companies or originating mortgages. Investors would buy shares in the mREIT to earn high-dividend income. One drawback of mREITs is that investors’ yields are influenced by interest-rate fluctuation, but despite this higher risk, they typically produce higher yields compared to equity REITs.
No matter which REIT you choose to invest in, it’s important to look at how they’ve historically performed and how the specific sector’s industry is expected to perform in the future.
Benefits of Investing in a REIT
Before addressing the perks of REIT investments, it’s necessary to understand that the success of a REIT investment is largely dependent on market conditions—just like many asset investments—and effective REIT management of properties and tenant occupancy. As with any investment, be sure to thoroughly understand the market and the historic, current, and projected performance of a particular REIT before purchasing a share.
While there are potential risks associated with all investments, REIT investments have several appealing benefits that offer investors more incentive, including:
- Earns a share of income from valuable real estate without having to manage or individually finance it
- Diversifies portfolio, since real estate is considered a different asset class than more traditional stocks and bonds, making it a lower risk compared to other portfolio assets
- Offers steadier high-dividend income and long-term capital appreciation compared to other most other investment assets
- Provides tax advantages as income from REIT investments isn’t taxed at the corporate level since REITs are considered pass-through corporations that are required to meet strict regulations and pay out 90% or more of income produced to shareholders, making REIT-investment income only taxable on an individual level
How to Invest in a REIT
Are you looking to build your financial portfolio or prepare for retirement? A REIT is a solid investment option that has historically provided higher total returns and lower risks, making it a great investment strategy to balance other stocks, bonds, etc. that you may have in your portfolio. To invest in REITs, you can purchase shares on stock exchanges or in a REIT mutual fund or exchange-traded fund. If you aren’t well-versed in investing or analyzing value in real estate investments, it may help to turn to a professional broker or financial investment advisor who can help navigate real estate investments.
Contact Focus Financial
At Focus Financial, our team of financial planners and investment management professionals can help you determine the best REIT investment for your financial goals. Our investment advisors will work with you to understand your unique situation and financial objectives and help you create a balanced portfolio that best minimizes risk and maximizes reward potential.
To learn more about our asset management services or to begin building your individualized investment portfolio and creating a passive income stream, contact Focus Financial, and we’ll help you find an independent financial advisor near you!
“Investing in real estate entails certain risks, including changes in: the economy, supply and demand, laws, tenant turnover, interest rates (including periods of high interest rates), availability of mortgage funds, operating expenses and cost of insurance. Some real estate investments offer limited liquidity options. Please consult with a financial professional prior to investing in any REITs.”