REITS – Real Estate investment trusts



This is a type of investment security that focuses on investing in real estate. A REIT typically operates like an investment trust. REITS is comparable to a mutual fund which enables small and large investors to acquire ownership in real estate ventures. REITS are often traded on major exchanges just like shares.

REIT companies like Ventas invest in commercial real estate like offices, apartment buildings, warehouses and hospitals, but they also invest in residential homes.

Why should you invest in REIT?

Interestingly, by Law REITS are required to pay out at least 90% of the dividend payout to shareholders.

Diversification: Risk is reduced when you invest in REITS. Different REIT focuses on different properties in the commercial and residential real estate. When a specific market is slacking, others may be doing well, so the risk is reduced since the loss can balance out with your gains.

Tax: REITS are exempt from corporation tax. Instead you pay income tax on your returns.

Access to the property market: By investing in REITS, you can participate in the property market and benefit from the advantages, but you don’t need to spend so much or go through the hustle with getting an actual property. All of the work is done by the REIT company.

Liquidity: REITS are traded on the stock exchanges. So buying and selling is very easy. Just imagine if you had to sell an actual property? That would take time to get the cash.

As an investor, you have no business maintaining the property.

Types of REITS

  1. Equity REITS: most of what have been explained above best describes an equity REIT. Equity REITs own and invest in properties. REIT companies get their revenue from leasing, and this revenue is then distributed to the shareholders as dividends. Examples of REITS include Ventas (trading as –VTR), Simon property group (SPG).
  2. Mortgage REIT: The REIT companies invest in property mortgages and own property mortgages. They loan money to real estate owners or they buy already existing mortgages or mortgage-backed securities. A mortgage-backed security is a type of asset-backed security that is secured by a mortgage or a collection of mortgages. These mortgages are packaged into securities and sold to investors. Revenue is made through interest earned either directly from mortgage or from mortgage-backed securities.
  3. Hybrid REIT: A hybrid REIT is one which combines both equity and mortgage REIT. In other words, income is generated from rents and capital gains. It also receives interest like a mortgage REIT. Example is the Vanguard REIT ETF (VNQ).

 My Opinion

I think investing in REITs is a good investment, especially in a stable economy. Certainly not in a period of financial crisis, as that investment will suffer loss. However, you can buy cheap if you enter at the right time so that when the economy stabilizes you can make a good profit. It really depends on how much risk you are willing to take. What is your risk preference?


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