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While the S&P 500 grew by 29% in 2021, REITs grew by more than 40%! It seems like the prospering real estate market has ensured that investing in REITs is a good idea.
If you are new to this investment tool and don’t know anything about how to invest in REITs, then you are in the right place. In the article below, we will chat more about REITs, the different types of REITs out there, and how to choose the best ones for you to invest in.
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REITs, or real estate investment trusts, are a way for individual investors to invest in real estate property without needing millions in the bank. REIT is a company that finances, operates, or owns real estate that produces income.
Established in 1960, they are a great way for individual investors to buy shares in commercial real estate portfolios, which were available only to extremely wealthy folks beforehand. Some kinds of properties that you could potentially invest in a REIT are:
As you can see, these are various forms of commercial real estate that would otherwise be inaccessible to an ordinary investor like you, who has only hundreds or thousands of dollars to invest.
REITs typically trade publicly on the stock market, and investors can buy and sell them just like stocks.
There are certain provisions that real estate companies must comply with to qualify as a REIT. These are:
Even though REITs have a pretty straightforward business model, not all real estate companies can qualify as REITs.
If you are interested in investing in REITs, you need to first understand the various types of REITs available on the stock market. Let’s look at them briefly below.
Equity REITs
Most REITs fall into this category. This is when a REIT owns and manages income-producing real estate. Revenues get generated primarily through rents, but they do not resell properties.
Mortgage REITs
These REITs lend money to real estate operators or owners through loans or mortgages. Or by acquiring mortgage-backed securities. Their earnings are calculated by looking at the spread between the interest they earn on mortgage loans and the cost it takes for them to fund these loans.
REITs are particularly sensitive to interest rate increases, so keep that in mind when choosing these real estate companies.
Hybrid REITs
These REITs are a combination of the two investment strategies above. If you are unsure if interest rates will rise or fall this year, use a hybrid REIT to protect you from these changes in interest rates. Hybrid REITs aren’t as sensitive to interest rate increases, but any interest rate falls can be potentially beneficial to the total returns.
Publicly Traded REITs
If the real estate company’s shares are listed on a public stock market, then they can be bought and sold by individual investors. These publicly-traded REITs are regulated by the SEC (US Securities and Exchange Commission).
Public Non-Traded REITs
These REITs are also regulated by the SEC, but they are not traded on the stock market and cannot be traded as easily. Thus, they are not so liquid. On the positive side, they tend to be more stable as they don’t get affected by market fluctuations.
Private REITs
These are only sold to institutional investors since they are not sold on the stock market and aren’t regulated by the SEC. Individual investors should stay away from such unregulated asset classes.
Be wary when investing in REITs that aren’t publicly traded or regulated by the SEC. There are many REIT frauds circulating since REITs have become a popular investment for many individual investors.
Follow the general investing rule of thumb – if it sounds too good to be true, it probably is.
Do not believe anyone marketing a REIT that promises mega returns that seem implausible or astronomical.
If you are going to invest in a REIT that’s not regulated by the SEC, make sure to do your due diligence by reviewing their annual and quarterly reports and any prospectus they might have. Also, check out the broker or investment advisor who’s recommending the REIT to see what their online reputation is.
As REITs have become such a popular investment, there are many different ways you can invest in them.
Of course, you could purchase publicly-traded REITs on the stock market. But you can also buy REIT mutual funds and REIT exchange-traded funds (ETFs). These can all be purchased through a stock broker or your online trading platform.
If you are wondering if you can purchase REITs in a retirement fund, they are eligible. Millions of US investors own REITs in their retirement savings. They are both eligible for defined benefit and defined contribution investment plans.
With so many different investments to choose from, why would you go for REITs? Well, investing in REITs has many pros.
If you are looking for cash flow from your investments, REITs are a great option since they give you a stable annual dividend. They also have the potential for capital appreciation long-term.
They are easy to buy and sell and are highly liquid. So, if you are the kind of person who doesn’t like to stay in an investment for too long, then REITs will work for you. It’s also always a great idea to invest in real estate, as it can balance out some of your more aggressive volatile investments.
Having REITs in your investment portfolio will also help diversify your investments, which is always a positive thing. REITs provide a higher dividend yield than other investments, so they are worth having in your portfolio.
On the other hand, REITs aren’t without their faults. They don’t have the capacity for much capital appreciation because of the way they get structured. Since 90% of the income gets paid to investors, they only reinvest 10% of taxable income back into the REIT to buy new holdings.
Worried about taxes? Then be careful since REIT dividends are taxed as regular income. And always pay attention to the management and transaction fees for each REIT you invest into, as that can eat away at your annual dividend yield.
Despite all the cons, REITs do look like a viable investment tool for individual investors who don’t have that much disposable income to put towards investments. If you wish you could get into commercial real estate but have no other way of doing it, then REITs make it accessible for you.
When choosing REITs to invest in, always consider the real estate market first. Which sectors of the real estate market are hot and booming?
For example, if you look at the current real estate market, healthcare is a fast-growing industry due to all the baby boomers needing healthcare services. That’s why investing in a REIT that focuses on medical buildings, outpatient care centers, retirement communities, and/or elder care facilities is best.
The great thing about investing in healthcare REITs is that they are going to do well even if the US economy goes into a recession since folks will always need healthcare services, no matter what’s happening.
As you can see, REITs are a great investment tool that too many individual investors aren’t taking full advantage of yet. It could be because they aren’t aware that such a great investment opportunity exists or don’t know enough about it to invest in it confidently.
If you are an individual investor who’s new to the investment world but looking to learn and grow as an investor, then we are here to help. Learn more about investing by practicing on a trading platform that has state-of-the-art infrastructure, bleeding-edge technology, and low latency connection, you can do so by signing up here.
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