Real Estate Investment Trust (REIT)
Real estate is in my opinion is always a risky investment due the market that keeps fluctuating however a real estate investment trust does seem to minimize the risks a lot more. A real estate investment trust is a compony that owns, operates or finances income-generating real estate. These companies make it possible for individual investors to earn dividends on real estate investments without having to buy, manage and or finance properties by themselves.
Before going any further it is important to understand the following:
- Real estate investments trust owns, operates or finances income by producing properties.
- Real estate investment trust are publicly traded.
- Real estate investment trusts are highly liquid and much more trustworthy than physical real estate investments.
- Real estate investment trusts invest in most property types such as: apartment complexes, data centers, hotels, health care facilities, infrastructures, office buildings, retail centers, self storage and warehouse properties.
How real estate investment trusts work:
These companies allow individual investors to buy shares in commercial real estate portfolios in the wide range of properties they have available. These investments are sold as stocks throughout the trading sessions and are publicly traded with major security exchanges. These stocks are also considered highly liquid investments.
These companies leases spaces and collect rent on the properties that distributes income that gets paid to investors and or share holders as dividends.
These companies mostly do not own property but chooses to finance real estate instead and earn interest from their investments.
There are three types of real estate investments trusts:
- Equity REIT- owns and manages income producing real estate. Revenues generated from collecting rents is the way they make their money and not the reselling of properties.
- Mortgage REIT- Loans money to property owners. Their earnings come from the net-interest margin. This type of REIT compony is potentially sensitive to interest rate increases and decreases.
- Hybrid REIT- This involves both equity and mortgage REIT practices. This type of real estate investment trust owns both property and mortgages.
However with all things in life there are pros and cons to this investment it is very easy to buy and sell these investments due to the trade on public exchanges. These investments are ideal for portfolio because of diversification and dividend based income. Real estate investment trust and or REIT’s also offer a more stable cash flow due to risk adjusted retunes. However they do not offer much capital appreciation and pay 90% of there income back to investors leaving them with only 10% to reinvest into new holdings and or properties therefor high management and transaction fees are a possibility. Dividends also gets taxed as a normal income and can become pricey.
Here is a shorter list of pros and cons:
- stable cash flow
- risk adjusted returns
- Low growth
- taxed as regular income
- can have high management and transactions fees.
All this research has left me to conclude that when investing in real estate a real estate investment trust is definitely something to consider seeing as it can help with minimizing risk and yes there are cons but they do not seem to be unbeatable.
I have learned something new today Shane reading your post. This form of company building (REIT) is new for me. I have learned that if you want to invest in Real estate you have to have much money and be prepared to take a big risk with your investment.
With this form of investment in the Real estate business that you describe you will minimize your risk and you do not need to be a millionaire to invest in Real Estate. You will probably also get a payback from your investment if you are lucky. Do you know any REIT companys where it is possible to invest some money?
There really are so many REIT companies world wide you are going to have to do some research to find a compony as such to invest in we really live in different sides of the world Mr. Steinar so I really won’t be much help to help you find a compony as such but I am glad that I could broaden your knowledge. If you really do wish to make an investment in real-estate I feel that real-estate investment trusts are really good options however like I mentioned above we are from different parts of the world and you are going to have to investigate for companies located close to you and I won’t be able to assist. However if you do manage to find a compony as such located close to you feel free to share the information in the comment section by doing so maybe you help someone else with some information relevant to the topic. Really sorry but South African real estate companies will for sure differ.