What is a REIT?
As a commercial real estate investor, you may find yourself coming across the term REIT and what is a REIT exactly, and should I be investing in REITs? A REIT, also known as a real estate investment trust, refers to a business that finances, runs, or owns real estate that generates profit. In this post, we provide you with a detailed REIT definition, explore the pros and cons of REIT investing, and walk you through how you can go about investing in REITs.
As highlighted above, a REIT is a corporation that owns profit-generating commercial property. REITs sell shares to investors, who receive dividends on the rent payments collected by property management.
REITs allow you to invest in the portfolios of several promising large-scale commercial properties. REITs tend to specialize in a certain sector. For example, you can find REITs dedicated to the retail market, or REITs specially tailored to the hotel market. When investing in REITs, you can also look into more obscure market offerings, from REITs focused on timberland to REITs for data centers.
Furthermore, REITs come in three main categories: equity REITs, mortgage REITs, and hybrid REITs. Equity REITs are the most common type of REIT. Equity REITs invest in and own income-producing commercial real estate property, such as malls or apartments that can be invested in through portfolios.
Mortgage REITs own and invest in commercial property mortgages and mortgage-backed securities. They loan money to commercial property owners and managers, so that they can purchase mortgages or real estate loans. In comparison, a hybrid REIT is a combination of the above: they invest in both commercial real estate mortgages and property.
In order to be called a REIT, a company must meet a set criteria. Among other criteria, a company must be managed by a board of directors, boast a minimum of 100 shareholders, Pay at least 90 percent of its taxable income in the form of shareholder dividends each year, and 75% of its assets must be in real estate.
The Ins and Outs of Investing in REITs
There are a number of ways that you can go about investing in REITs. You can buy publicly listed REITs on the U.S. stock exchange. These REITs can be purchased just as you would purchase other types of stock. You can also invest in non-traded, public REITs. Just as publicly listed REITs are registered with the Securities and Exchange Commission, non-traded REITs are also registered with the SEC. However, unlike publicly listed REITs, these REITs are not listed and traded on the public stock exchange.
Private REITs can also be bought. In comparison to public REITs, private REITs are not registered on the stock exchange and do not require SEC registration. In addition, sales of these REITs are typically limited to institutional investors with a net worth over one million dollars.
You can also invest your funds in a REIT ETF, which combines your money with the money of other investors in order to buy REIT stocks.
The Pros and Cons of REIT Investing
REITs are attractive investment opportunities for many investors in the commercial real estate field. REITs take the headache out of purchasing and managing property. The everyday stresses of taking care of a property is all taken care of for you by the property management team.
However, REIT investing involves a certain level of risk, as they function like stocks. This makes REITs vulnerable to share price volatility based on market trends. Risk is best averted by investing in a diverse REIT portfolio. It might be your best option to select REITs from different sectors of the commercial real estate market.
Despite the element of risk involved in investing in REITs, they can also offer you a high level of liquidity, you can easily share your shares and you are not tied to property. In addition, you can also expect to see returns ranging from 2-6% on any REITs you invest in.
In contrast to purchasing and managing your own commercial real estate investment, investing in REITs will leave you with a smaller return on your investments. For example, if you purchase office space for $300,000, you will see a greater return on investment than you would if you put down $2,000 on a property owned by a REIT. However, the fact that REITs are generally a less expensive initial investment than purchasing a property can make them a great choice if you are cash-strapped.
REITs Broken Down
Despite the risk involved, REIT investing offers commercial real estate investors several benefits, including the allure of simplicity and a high level of liquidity. These factors make REITs a popular choice among investors. While purchasing commercial property outright comes with less risk and greater returns on your investment, REITs are a smart choice if you are looking to get into the market and have little cash, or if you would like to diversify your investments.
If you’d like more advice on wise commercial real estate investments and the latest market trends, take a look at our past posts on the topic.