Real Estate Investment Trust

REITs also known as real Estate Investment Trusts are companies that own income-producing real estate. REITs can be an ideal investment for people who want to invest in real estate without paying the often hefty upfront cost. Examples of REITs include apartment complexes, warehouses, assisted living facilities, corporate buildings, or resorts.

There are both publicly traded REITs and non traded REITs. Publicly traded REITs have been registered with the SEC and therefore can be publicly traded on a stock exchange. Non-traded REITs may be registered with the SEC, but they don’t trade publicly.

REITs are ideal for individuals who want to diversify their portfolio and are interested in passive and fixed income forms like dividend payments.

Types of REITs

There are three main types of REITs and they include equity, mortgage, and hybrid. The main difference between all three is in how income is generated for investors. Note that REITs can also be categorized by the industry they operate in. Some common industries include retail, residential, healthcare, office, and mortgage.

Equity
These types of REITs are companies who own or manage properties that produce income from collecting rent on or selling properties. For instance, equity REITs may own a multi-family apartment complex where they rent units to tenants. They generate cash from those rental payments or from gains they acquire from selling properties.

Equity REITs are able to finance their investments using the money pooled together from individuals who buy equity REITs. The majority of REITs operate as equity REITs according to the National Association of Real Estate Investment Trusts (NAREIT).

Mortgage
Also known as mREITs, they are the opposite of equity. This type of REIT doesn’t own, acquire, or operate real estate. Instead, they provide capital to money-making property owners via vehicles such as mortgages or mortgage-backed securities (MBS). The latter is like a basket of real estate debt sold on the secondary market by the banks that initially issued the loan.

A way to look at it is that mREITs give investors a chance to profit from the debt in real estate while equity REITs allow you to profit from the actual properties.

Hybrid
Hybrid REITs are a hybrid of both of the aforementioned as they hold both mortgages and property. For investors who want the best of both worlds, this could be an ideal option.

Benefits and Drawbacks of REITs

Part of making informed investment decisions is weighing the pros and cons before diving in. A primary pro of investing in an REIT is you can diversify your portfolio and create a consistent form of income. Sometimes, REITs can result in higher yields than other investments, especially when interest rates are on the higher side.

That said, a disadvantage of REITs is that ones that are non-exchange traded can carry relatively high risk because they aren’t traded on the stock exchange. This means they don’t sell as fast as a stock on the open market could, making them illiquid. Another downside is that their value can be difficult to decipher because they’re not publicly traded.

Buying And Selling REITs

The process of buying and selling REITs is similar to any other security available on a major stock exchange. Find the REIT’s symbol, search for it on the stock exchange, and purchase shares through a broker.

To purchase non-traded REITs, contact your broker and find out if they’re participating in that particular offering. As with any investment, before putting money in an REIT across any sector, do your research or consult a finance professional.

To get started, reach out to one of our financial experts.