Are you new to investing? Wondering what all the chatter about REITs is about? If so, this is your source of information. We’ll provide you with all the basics you need to know and understand this critical investing topic.
The Basics of REITs
Also known as real estate investment trusts, REITs provide individual investors with the ability to invest in much larger real estate properties that produce income.
REITs are companies with multiple real estate assets that generate income through rent and leasing. This could include any of the following:
- Shopping malls
- Office buildings
- Hotels and other short-term rentals
- Apartment buildings
- Storage facilities
REITs are a little different from regular real estate companies. Traditional real estate firms will develop properties to resell them. For instance, they may acquire properties to renovate or build new properties on a fresh site.
REITs instead consider real estate as a longer-term income investment. They buy and develop these properties to operate them within the boundaries of the organization.
Why Invest in REITs?
REITs are a great way for individual investors to get into the realm of commercial investment income.
Commercial real estate property can get into the tens – or even hundreds – of millions of dollars to develop and operate. This type of number is obviously far too high for an individual investor looking to broaden their portfolio!
REITs enable commercial real estate for people who would otherwise not be able to buy their own commercial real estate.
The Different Types of REITs
The two main types of REITs are traded and non-traded.
1. Traded (Public) REITs
Several REITs are registered with the U.S. Securities and Exchange Commission (SEC). This gives them public trading status on the stock market.
2. Non-Traded REITs
Non-traded REITs are not listed on the public stock exchange. As private entities, they may not have as many restrictions in place as public companies. However, that could expose your investment to a higher level of risk.
Benefits of REITs
Utilizing this investment avenue offers several distinct advantages for individuals:
Allows Commercial-Level Investment for Individuals
As mentioned, the price of commercial property is often far too high for any individual investor. REITs allow you to jump into this potentially lucrative area of real estate.
Potentially Higher Dividend Yields
Some REIT investments could provide higher dividend yields for you than other types of investments.
Getting into real estate can broaden your overall portfolio, which can help mitigate risk in other more volatile areas.
Risks of REITs
Non-public REITs don’t offer the liquidity of other investments. They can’t be sold immediately on any sort of open market. For times when you may need money more quickly, you’re out of luck.
Conflicts of Interest
A non-traded REIT is usually managed by some type of external manager instead of the employees of the firm. The external-internal difference could create areas where a manager may not be acting in the interest of shareholders.
The Long and Short of REITs
REITs also incur some fees in terms of how you invest them. And you’ll want to be suspicious of REITs not officially registered with the SEC.
To ensure you’re making a sound investment, you may want to speak with an experienced financial advisor. They can help you determine how to incorporate these investments into your portfolio without exposing you to unnecessary risk.