A real estate investment trust (REIT) is a publicly traded entity that owns, operates, or finances income-generating real estate. By putting your money into a REIT, you are essentially buying a tiny piece of a portfolio owned by a corporation (or trust). As their portfolio appreciates, the trust pays out dividends to the investors.
Relative to other investment options, REITs are far less time-consuming and labor-intensive and may generate steady income stream for investors. On the flipside, they offer little in the way of capital appreciation. Here’s what you need to know about this investment strategy!
Equity REITs vs Mortgage REITs vs Hybrid REITs
There are three types of REITs: Equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs, which own and operate income-producing real estate. As its name suggests, mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages. This model earns income from the net interest margin. Hybrid REITs are a combination of the other two strategies: equity and mortgage REITs.
Publicly traded REITs vs non-traded REITs vs private REITs
A traded REIT trades on a public stock exchange, such as NASDAQ and NYSE. They are regulated by the U.S. Securities and Exchange Commission (SEC). Non-trade REITs are registered with the SEC but don’t trade on public stock exchanges. Though they are less liquid than publicly traded REITs, they tend to be more stable. Private REITs, on the other hand, are not registered with the SEC and don’t trade on a public stock exchange. Private REITs aren’t accessible to most investors.
REITs distribute dividends to investors on a monthly basis. As required by law, they must pay 90% of income back to investors. The other 10% can be reinvested into the REIT to buy new holdings.
There are management fees associated with all REITs. REITs are managed by a board of directors and trustees. It is important to find out who’s behind the management team, their track record, and compensation model. If the compensation model is performance-based, there is an incentive for the team to pick the right investments and strategies.
The dividends you earn from REITs are taxable up to the maximum rate of 37%. However, taxpayers may deduct 20% of their dividend income.
REITs are an accessible investment strategy. You can invest in publicly traded REITs by purchasing shares through brokers, such as Fidelity or TD Ameritrade. You can also buy shares of non-traded REITs through a broker or financial advisor who participates in the non-traded REITs offerings. The SEC has a free search tool that allows you to look up if an investment professional is licensed and registered.
When investing in REITs, be sure to consider your financial goals and how they align with the strategy you want to pursue. Publicly-trade REITs are easier to buy and sell than actual properties, but they are subject to market volatility. The longer you hold on to it, the more time you’ll have to recover from potential dips.
Are you interested in learning more about real estate investing? RLG would love to help you find a suitable investment strategy for your goals! Call us today to learn more!