A real estate investment trust (REIT) is a company owning and typically working property which generates income. Many REITs specialize in a particular property industry, focusing their time, energy, and financing on that specific segment of the whole real estate horizon. But, diversified and specialty REITs often hold different kinds of properties in their portfolios. Properties included in a REIT portfolio could consist of apartment complexes, data centers, healthcare centers, hotels, infrastructure–in the kind of fiber cables, mobile towers, and energy pipelines–office buildings, retail facilities, self-storage, timberland, and warehouses. 1 advantage of REITs for regular investors is they provide the chance to own some of property that generates dividend-based income.
The provision enables individual investors to purchase shares in commercial property portfolios that receive income from an assortment of properties.
Real Estate Investment Trust (REIT)
Knowing a REIT
Many REITs have a simple business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.
To qualify as a REIT, a firm must comply with specific provisions in the Internal Revenue Code. These requirements include to mostly own income-generating property for the long term and distribute income to investors. Specifically, a company must meet specific requirements such as:
Invest at least 75 percent of its total assets in real estate, cash or U.S. Treasurys
Get at least 75 percent of its gross income from real property rents, interest on mortgages funding the real property, or from sales of property
Yield a minimum of 90% percent of its taxable income in the form of shareholder dividends annually
Have a minimum of 100 shareholders after its first year of existence
Have no greater than 50 percent of its own shares held by five or fewer individuals during the last half of the taxable year
Other requirements such as the REIT be an entity that is taxable as a corporation in the eyes of the IRS. What’s more, the enterprise should have the direction of a board of directors or trustees.
A real estate investment trust (REIT) is a company which owns, operates or financing income-producing properties.
Mortgage REITs trade or hold mortgages and mortgage-backed securities.
REITs generate a steady revenue stream for investors but provide little in the way of capital appreciation.
Many REITs are publicly traded like stocks, which makes them highly liquid–unlike many real estate investments.
Kinds of REITs
There are lots of types of REITs. The funds have classifications that indicate the sort of business they do and can be categorized based on how their stocks are purchased and sold.
Equity REITs is the most frequent form of enterprise. These entities purchase, own and manage income-producing property. Revenues come mostly through rents rather than from the reselling of their portfolio properties.
Mortgage REITs, also called mREITs, lend money to property owners and operators. The lending company may be either straight through loans and mortgages or indirectly through the purchase of mortgage-backed securities (MBS). Their earnings come primarily in the net interest margin–the spread between the interest they earn on mortgage loans and the cost of funding these loans. As a result of mortgage-centric focus of the REIT, they are potentially sensitive to interest rate rises.
Hybrid REITs enterprises hold both bodily rental property and mortgage loans in their portfolios. Based upon the stated investing focus of this thing, they may weigh the portfolio to more land or more mortgage holdings.
Publicly Traded REITs offer stocks of publicly traded REITs that record on a national securities market, where they’re purchased and sold by individual investors. They’re regulated by the U.S. Securities and Exchange Commission (SEC).
Public Non-traded REITs also registered with the SEC, but do not trade on national securities exchanges. Because of this, they are less liquid than publicly traded REITs but are inclined to be more secure because they are not subject to market changes.
Private REITs aren’t registered with the SEC and do not trade on national securities exchanges. They operate solely as private pensions selling solely to a pick list of investors.
Pros and Cons of Investing in REITs
REITs can play a significant role in an investment portfolio. Like all investments, they have their pros and cons.
On the other hand, REITs are easy to purchase and sell, since most trade on public exchanges. This marketable feature mitigates some of the traditional drawbacks of property. Traditionally, property is notoriously illiquidity–land can have a while to sell or buy –and its lack of transparency as not all markets offer you reliable information on taxation, possession, and zoning.
Performance-wise, REITs provide attractive risk-adjusted returns and steady cash flow. In addition, a property presence can be good for a portfolio, diversifying it using a different asset class that could serve as a counterweight to equities or bonds.
On the downside, REITs do not offer much in terms of capital appreciation. As part of the structure, they need to pay 90 percent of earnings back to investors. So, only 10 percent of taxable income can be reinvested back into the business to buy new holdings.
1 main danger of REITs is that they’re subject to real-estate market changes. Additionally, like most investments, do not guarantee a profit or guarantee against losses.
It is possible to invest in publicly traded REITs–as well as REIT mutual funds and REIT exchange-traded funds (ETFs)–by buying shares through a broker. You can purchase shares of a non-traded REIT via a broker or financial adviser who participates in the non-traded REIT’s offering. REITs are also contained in an increasing number of defined-benefit and defined-contribution employer-sponsored retirement and investment strategies. Naret, a Washington D.C. based research and advocacy company for the U.S.-based REIT market, quotes 80 million U.S. investors own REITs through their retirement savings and other investment capital.
Nareit finds that there are more than 225 publicly traded REITs in the U.S., so you will have some homework to do before deciding which REIT will work best for your portfolio.
Make certain to think about the REIT’s management team and track record, and discover how they’re paid. When it’s performance-based reimbursement, chances are they will be working hard to select the proper properties and pick the best strategies. Needless to say, it’s also advisable to check at the numbers, for example expected growth in earnings per share (EPS) and current dividend yields. A particularly beneficial metric is that the REIT’s capital from operations (FFO), which measures the cash flow generated from the REIT’s assets. Another metric commonly used with REITs is that the Financial Management Rate of Return (FMRR).
Another consideration when choosing REITs would be to look at what sectors of the real estate market are hot. Consider what booming sectors of the market, generally speaking, could be tapped into through property. For instance, healthcare is one of those fastest-growing businesses in the U.S.–particularly in the rise of healthcare buildings, healthcare centers, and senior care centers and retirement communities.
Several REITs focus on this industry. With a market cap of almost US$15 billion, it’s a huge company–big enough to become a part of their S&P 500, actually –and quite liquid. Some 2.56 million shares trade every day. At $31.25 per share, as of April 5, 2019, it is trading near its 52-week high, and offering a dividend yield of 4.32%. Its recently restructured portfolio concentrates on life sciences centers –diagnostic facilities, labs, genomics, and other amenities –medical office buildings, and senior housing.
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