What are Real Estate Investment Trusts?

What are Real Estate Investment Trusts?

Getting into the real estate game can be very lucrative, especially if you want to earn some passive income. In fact, this is the way that many of the tycoons and billionaires today were able to gain their wealth.

However, not everyone has tens or hundreds of thousands of dollars to throw around to buy up land or properties. So, how can you start on a limited budget and with generally low risk?

Enter Real Estate Investment Trusts, better known as REITs. This is a very promising way for beginners to get into the real estate market without needing large capitals and with less chances of losses when compared to putting your money into the stock market.

This article gives a simple yet concise explanation about what REITs are all about, and why you may consider investing with these types of income-generating opportunities.

What are Real Estate Investment Trusts?

REITs are types of companies that delve into real estate, namely buying and developing lands or renting out locations like warehouses, apartments or other types of residential dwellings, and the like.

REITs offer shares to multiple investments so that they can gain enough capital to purchase, operate, and likewise operate properties, usually more than one.

Each share that you will purchase will vary in cost, but typically you would need an investment of at least $1,000 in order to purchase shares.

There are different types of REITs, but they operate in pretty much the same way. Investors of REITs can earn through dividends or by selling their shares once they appreciate in value.

REITs are usually registered with the SECs or have some other form of oversight. They must also be registered as a corporation with a certain number of requirements such as number of investors or percentages of assets in cash or real estate, among others.

In some cases, investors must also meet certain criteria before they are allowed to purchase shares. This may include having a certain annual income or net worth before being considered as an accredited investor, as well as other requirements or licenses.

For investors owning shares of REITs, they have fractional ownership of multiple properties, and you will gain all the benefits, such as profits and capital gains, from these properties as well as any potential losses based on the number of shares that you own.

What are the Advantages of REITs?

Historically, REITs have performed far better than the usual stocks or bonds. This trend can be seen over the past 50 years, with many REITs even outperforming the S&P 500 in some cases.

This makes REITs a very good way to procure an income generating asset and diversify your portfolio.

Not only that, but earning from REITs is completely passive. This is because the REIT is the entity responsible for all facets of the operation, from procuring properties, development, collecting rent, and other processes.

Another benefit to investing in REITs is that, at least in the case of publicly traded REITs, the process of buying and selling shares is very easy. This gives REITs the advantage of better liquidity especially when compared to traditional real estate that you may have difficulty converting into cash.

Lastly, REITs are diverse assets similar to mutual funds. This means that your money is invested into a multitude of assets and not just one piece of property. This is a much more conservative approach with the benefit of spreading and minimizing risks across multiple investments.

Are REITs Risk Free?

While REITs are generally considered to be relatively low risk, it is not without its downsides. One of these disadvantages is the fact that you do not have control over the properties managed by the trust, despite your ownership through shares.

Also, shares from REITs can also suffer from devaluation due to factors such as interest rates, fees, and the general status of the market.

Investors should also note that some REITs have a lock-in period which can prevent you from liquidating your shares for a fixed period of time. Some shares, especially those owned by private REITs, cannot be sold off easily and quickly as well.

Lastly, investors should know that income earned from REITs will also be taxed, possibly by up to 37%, plus any surcharges. However, there may be some deductions that can be possibly made. It would be wise to consult with a qualified accountant regarding this.

Conclusion

Real estate investment trusts, as you can see, carry with them both advantages and disadvantages. It cannot be denied, however, that investing in REITs is still one of the best and low-risk ways to enter the real estate market.

This type of investment is best for those with little to no investment experience, or for those who want to build and grow their portfolio with limited funds.

Still, it is still wise to consult with an expert or a financial advisor and, of course, do some due diligence and research if investing in REITs is the best move for you.