What are Real Estate Investment Trusts?
REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange-traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to out and buy, manage or finance property.
Types of REITs
- Equity REITs. Equity REITs typically generate revenue through rents. It is the most common type of REIT. They acquire, manage, build, renovate and sell income-producing real estate.
- Private REITs. Private REITs are real estate funds or companies that are exempt from SEC registration as shares are not traded on national stock exchanges.
- mREITs. Mortgage real estate investment trusts invest in mortgages, mortgage-backed securities and related assets. They earn income from the interest on their investments.
- PNLRs Public Non-Listed REITs register with the Securities and Exchange Commission (SEC), but do not trade on major securities exchanges. They operate as any other REIT but face redemption restrictions that limit their liquidity.
How do REITs work?
REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.
With a direct real estate investment, you buy a specific property or a stake in one, such as an apartment complex (residential) or a shopping center (commercial). Direct real estate investors make money through flipping the home, rental income, appreciation, and profits generated from any business activities that depend on the real estate.
Pros of Direct Real Estate Investing
One benefit of investing in physical properties is the potential to generate substantial cash flows – as well as the ability to take advantage of numerous tax breaks to offset that income. For example, you can deduct the ordinary and necessary cost to manage, conserve, and maintain the property. Another large tax break is for depreciation, in which you deduct the costs of buying an improving a property over its useful life ( and lower your taxable income in the process).
You also have more control over decision making than you would with REITs. For example, you can select only properties that match your preferences for location, property type, and financing structure. You can also set rental prices, choose tenant and decide how many properties to buy.
Advantages of REITS
Probably the biggest advantage of REITs is that individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-cost way to invest in the real estate market. You can invest in a fund with as little as $500 – a much lower entry point than direct real estate investing.
Another benefit is that REITs offer enticing total return potential. By law, REITs have to pay at least 90%.of taxable income to shareholders, and its not uncommon to have a 5% dividend yield – or even more. REITs also have potential for capital appreciation as the value of the underlying assets increases.
The most important perk is liquidity. Like stocks, you can buy and sells REIT securities on an exchange.