Real Estate Investment Trusts (REITs) Definition 🧐
Real Estate Investment Trusts (REITs) Definition 🧐
What Is REIT stands for?
REIT is an abbreviation for "Real Estate Investment Trust." A REIT is a partnership, corporation, trust, or organization investing directly in real estate by purchasing properties or mortgages. REITs issue stock exchange-traded shares that can be bought and sold much like regular equities. To be classified as a REIT, the corporation must invest at least 75% of its assets in real estate and generate at least 75% of its revenue from real estate-related operations.
REITs, similar to mutual funds, aggregate the capital of multiple investors. Individual investors can now earn dividends from real estate investments without owning, managing, or financing any properties themselves.
Congress created REITs in 1960 to amend the Cigar Excise Tax Extension Act. The provision permits investors to purchase shares in commercial real estate portfolios, which were previously only available to affluent individuals and massive financial intermediaries.
Apartment complexes, data centers, healthcare facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses may be included in a REIT portfolio.
REITs, in general, concentrate on a single real estate sector. On the other hand, diversified and specialty REITs may have a variety of properties in their portfolios, such as a REIT that owns both office and retail facilities.
Many REITs are openly traded on major stock exchanges, and investors can buy and sell them like stocks at any time during the trading day. These REITs are often traded in large volumes and considered liquid assets.
Types of REITs
There are three types of REITs:
- Equity REITs:
Most REITs are equity REITs that own and manage income-producing real estate. Rents are the primary source of revenue (not by reselling properties).
- Mortgage REITs:
Mortgage REITs offer property owners and operators money through mortgages and loans or indirectly through purchasing mortgage-backed securities. Their earnings are primarily driven by the net interest margin, the difference between the interest they make on mortgage loans, and the cost of funding these loans. Because of this paradigm, they are potentially sensitive to interest rate increases.
- Hybrid REITs:
These REITs employ both equity and mortgage REIT investment strategies.
How to Invest in Real Estate Investment Trusts
You can buy shares in publicly traded REITs and REIT mutual funds, and exchange-traded funds (ETFs) through a broker. Shares of a non-traded REIT can be purchased through a broker or financial advisor who participates in the non-traded REIT's offering.
REITs are also becoming more common in defined-benefit and defined-contribution investment plans. According to Nareit, a Washington, D.C.-based REIT research organization, an estimated 145 million US individuals own REITs directly or through their retirement savings and other investment vehicles. However, if you have enough budget to own a property by yourself, you can join REALIFF to find the best deal on your home purchase!
The Benefits and Drawbacks of Investing in REITs
REITs can be a significant aspect of an investment portfolio since they provide a substantial, consistent annual dividend and the possibility of long-term capital appreciation. Over the last 20 years, REIT's total return performance has exceeded the S& P 500 Index, other indices, and the rate of inflation. REITs, like all assets, offer perks and disadvantages.
On the bright side, because most REITs trade on public exchanges, they are simple to acquire and sell—a trait that mitigates some of the conventional downsides of real estate. REITs provide attractive risk-adjusted returns and consistent cash flow. A real estate presence can also benefit a portfolio since it provides diversification and dividend-based income—and the dividends are frequently more extensive than those available from other investments.
On the negative side, REITs do not provide much capital appreciation. They must return 90 percent of their earnings to investors as part of their structure. As a result, only 10% of taxable income can be recycled into the REIT to purchase new securities. Other disadvantages include that REIT dividends are taxed as ordinary income, and certain REITs charge hefty management and transaction costs.
Example of a REIT
Another factor to consider while selecting REITs is the hot segments of the real estate industry. Which booming sectors of the economy can be tapped into through real estate? Healthcare, for example, is one of the fastest-growing businesses in the United States, particularly in the construction of medical buildings, outpatient care centers, eldercare facilities, and retirement complexes.
This industry is the focus of several REITs. One example is Healthpeak Properties (PEAK), formerly HCP. It has a market cap of roughly US $18.9 billion as of April 2022, with approximately 4 million shares traded daily. Its portfolio, which includes interests in over 615 properties, is focused on three key asset classes: life sciences complexes, medical offices, and senior housing.