If you are new to investing in anything other than your companies 401K you should definitely considered investing in REITs.
What Are Real Estate Investment Trusts
Real estate investment trusts, or REITs, are an asset that allows individuals to make an investment in income producing, larger scale real estate.
A REIT is a company that is in charge of the ownership and management of these real estate properties, as well as other assets similar in nature.
Some of these properties could include offices, malls, apartment houses, hotels, and storage areas, as well mortgages and loans.
A REIT is unlike real estate companies because they do not actually build properties to sell, but instead acquire and develop these properties to include in their investment portfolio.
Investment trusts give the common investor the ability to purchase a portion of the revenue from real estate property, without having to actually buy or own any of the real estate. A great addition to your portfolio.
Many REITs are traded through public stock exchange, and are backed by the SEC and individual investors shares instead of entering into a real estate partnership.
There are also non-traded REITs, which are still backed by the SEC, but are not on the public stock exchange.
It is important to understand if a certain REIT is publicly traded before purchasing any shares, as pros and cons exist for purchasing either of these assets.
These investments also usually offer more attractive dividend yields than other investments.
4 Types of REITs
Equity REITs
This encompasses the majority of REITs. The real estate companies own properties that are leased to tenants. Office buildings, apartment complexes, shopping centers. They pay the operating expenses for the properties then the bulk of the income is for dividends paid to the shareholders. Income is also generated through the sale of properties.
mREITs
These are investments in residential and commercial mortgages. Along with residential and commercial mortgage-backed securities. Income is earned on the interest of the investments. These are included in many mutual funds or exchange traded funds (ETF). They have a history of relatively high dividends.
PNLRs
Public non-listed REITs are registered with the SEC but do not trade on national stock exchanges. They follow the same rules as publicly traded REITs from the SEC but are not as liquid and their counterpart. They usually have a minimum holding period
Private REITs
Private REITs are not traded on the stock exchange therefore they are exempt from SEC regulation. These are generally only sold to institutional investors.
If an investor would need to make money fast, a non-traded REIT may not be the best way to go. Non-traded REITs also do not offer the exact value of their share price until 18 months after the offer closes. That would mean it could take years after a profit from the investment could be seen. For a certain time period, it would be hard to see the value of your non-traded REIT and it’s fluctuations in the market. Lastly, non-traded REITs provide a higher dividend yield than publicly traded REITs, but they typically pay distributions that exceed their funds income from operations. They may use offering income and loans to accomplish this. This would reduce the share’s value and the cash of the company which may be used to purchase more assets.
Non-traded REITs also are managed externally as opposed to by their own employees. This could eventually mean conflicting interests with shareholders. For example, the REIT could pay their manager for property acquisitions and assets, but these fees may not be in the best interest of the shareholders.
An individual could buy a public traded REIT by simply purchasing them through a broker. These investments are openly listed on a major stock exchange. A non-traded REIT share could also be purchased through a broker, but may require you to seek out one that would participate in these specific offerings. Other options available are a REIT mutual fund or an REIT exchange-traded fund.
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