When it comes to non-traditional investing methods, there are plenty of options to choose from these days, including booming markets such as cryptocurrency. However, if you’ve always been keen to put some money into real estate, but haven’t had enough funds, or you feel stressed about the idea of trying to find the right property and then renovate, lease it, refinance, and later sell the investment, it might be time to try something a little different.
Read on for the lowdown on real estate investment trusts (REITs), and some prime reasons why you should consider this investment option today.
What are REITs?
Real estate investment trusts are companies which invest their money into buying and managing income-producing real estate. Usually the actual properties are the managed asset, but sometimes the mortgages on real estate are managed too. REITs are quite like ETFs and mutual funds, however rather than putting money into stocks, they own properties and/or mortgages which are kept and used to produce income.
While an REIT can invest in any type of property, funds are typically used to buy commercial real estate like malls, office buildings, hotels and apartments. Unlike traditional real estate firms, real estate investment trusts don’t tend to develop and then resell their investments; instead they buy and then hold them, managing and developing the properties as needed as part of an investment portfolio.
To qualify as an REIT, an organization has to have at least 100 shareholders. As well, no five or less of these shareholders is allowed to own more than half of the shares between them. Furthermore, the trust must invest a minimum of 75 percent of its funds into property.
Different REIT Types to Choose From
If you’re thinking of joining a real estate investment trust, note that there are numerous types of organizations to put your money into. There are publicly-traded REITs, for instance, which are listed on the stock exchange; as well as non-traded trusts. You’ll also find both Mortgage REITs and Equity REITs to choose from. The former borrow money at low, short-term interest rates and use this to purchase mortgages paying significantly higher longer-term interest rates. From there, their profits come from the difference between the two rates. Alternatively, Equity trusts work by owning and operating income-producing real estate.
When comparing REIT options, you’ll also notice different funds use different investing strategies. For example, some like to have a diverse portfolio where they buy properties of different types, while others stick to investing just in one asset class. They might, perhaps, specialize in residential properties, such as apartment buildings; or opt for retail lots like freestanding retail stores or larger shopping malls. Other options includes specialties like whole office buildings; senior housing; or healthcare properties such as nursing homes, hospitals, and medical centers.
Reasons to Invest in REITs
There are many different reasons why investors choose to put their money in REITs. One of the main reasons is that these types of trusts have, historically, proven to provide top returns, and a nice, steady source of income for investors. They also can work well to provide people with more diversification, higher returns, and lower risks than other types of assets (although, of course, note that there are always some risks and limitations when investing, no matter which kind of assets you choose).
For many people, the big attraction of real estate investment trusts is that they provide the chance to enjoy the benefits of investing in large-scale, incoming producing properties, without having to worry about researching, inspecting, and comparing properties, or handling the paperwork and negotiation process involved in buying or selling them or getting a loan. There’s also no need to spend time on regular maintenance or trying to find new tenants for properties.
In addition, because you don’t have to buy a whole property by yourself, you can branch out into real estate even if you don’t have hundreds of thousands of dollars to invest, or the credit score or pay check to qualify for such a high amount. Most real estate investors never have the ability to invest in commercial real estate because it’s so expensive, but when you’re part of an REIT, this changes.
Lastly, some people choose to invest in a real estate investment trust because they see it as a way of saving money on taxes. REITs have to maintain a regular dividend payout ratio of at least 90 percent of the fund’s annual taxable net income (not counting capital gains), and these dividends get taxed as ordinary income as opposed to corporate income. As a result, members can enjoy reduced tax payments.
Founder Dinis Guarda
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