Today, we’re going to talk about a type of investment vehicle which isn’t too well-known among the general public. Most people are at least somewhat familiar with mutual funds, stock portfolios, and other types of investment vehicles; but most people aren’t familiar with real estate investment trusts, or REITs. Even though they’re referred to as “trusts,” REITs are a type of corporate entity which invests in income-generating real estate with investor funds. First, we will go over the basics of these entities and then highlight some of their advantages and drawbacks. REITs are interesting things, and may be quite financially beneficial depending on the particular investment strategy or real estate niche. If you’re looking for a new type of investment, a REIT might be a good option.
Basics of REITs
REITs are not like a normal trust which is created for a beneficiary and managed by a trustee; they are corporations, and investors purchase an equity stake in the REIT and then receive dividends based on the REIT’s financial performance. Those dividends are then taxed as they would be if they derived from any other corporation. REITs can be publicly traded, public but non-traded (which means they’re registered with the SEC but don’t offer shares publicly), or private. REITs generally have a complex management structure: they are run by a team of investment strategists, researchers, and others who work to ensure that the REIT is as profitable as it can be. To qualify as a REIT, corporations have to meet various requirements, which include investing a certain percentage of their assets in real estate, receiving a certain percentage of their income from real estate sources, having a minimum number of investors, and so forth.
Typically, a REIT will concentrate in a particular sector of the real estate industry – such as apartment complexes, hotels, or mortgage-backed securities, for instance – or, it may be a hybrid which invests in multiple sectors.
Advantages & Drawbacks
There can be many advantages to investing in a REIT, and a number of drawbacks as well. Investing in a REIT can be advantageous because REITs tend to offer fairly steady returns, and even have risk-adjusted returns which account for market volatility. Thus, if you’re looking for a stable flow of cash, then a REIT may be a good choice. However, when you invest in a REIT, you’re going to be subject to all of the risks which affect the real estate industry. There’s no guarantee that the REIT will perform at a certain level, or that it will perform well at all. You may end up losing money. The real estate market can be quite volatile, as we know, and just because REITs invest in a pool of properties doesn’t completely protect them against this volatility. And, even though most REITs offer steady dividends, they usually don’t offer dividends which are particularly high, and so investors will need to be comfortable with receiving stable returns which are a bit on the low side (compared to other investment options).