REITs allow individual investors to gain exposure to the commercial real estate market without actually having to purchase any property of their own. How and who should invest in real estate investment trusts (REITs), and what are the benefits of doing so, will be discussed. REIT investing involves putting money into Real Estate Investment Trusts, which are companies that own or finance income-producing real estate.
Many REITs are publicly traded and SEC-regulated. Some REITs might lack public listing despite SEC approval. Non-publicly traded real estate investment trusts (also known as non-exchange traded REITs). This is arguably the most salient distinction between REITs. You should research whether or not a REIT is publicly traded, as this will affect your exposure to potential gains and losses.
Benefits and Drawbacks of REIT
By investing in a REIT, one can diversify their holdings to include real estate. Also, the dividend yields of some REITs may exceed those of comparable investments. However, there are dangers, especially with unlisted REITs. Non-traded REITs pose unique challenges due to their absence from stock exchanges.
Shortage of Funds
Investments in non-listed REITs are considered “illiquid.” Typically, they don’t sell well in the free market. If you need cash immediately yet own shares in a non-traded REIT, you may have a difficult time selling them.
Transparency in Stock Prices
Shares in a non-traded REIT may be difficult to value because their market price is not readily available. Share prices for non-traded real estate investment trusts are typically not disclosed until 18 months after the offering closes. This may occur long after you’ve already invested in the company. It may take a while before you have any idea of the value of your non-traded REIT investment or the degree to which it is volatile.
Offering or Borrowing Funds for Distributions
When compared to publicly traded REITs, the dividend yields of non-traded REITs may be more appealing to investors. However, unlike publicly quoted REITs, non-traded REITs frequently distribute more money to shareholders than they bring in via operations. Sales and loans could be used to finance this effort.
Since doing so would reduce the value of the company’s shares and the cash available to invest in more assets, publicly traded REITs rarely engage in this practise. REIT investing offers individuals a chance to enter the real estate market without directly owning properties.
Divergent Priorities
As opposed to having in-house management, most non-traded REITs hire a professional manager to oversee operations. Because of this, shareholders’ priorities may shift. The external manager’s compensation hinges on factors like property acquisitions and asset value within the REIT. Fee-based incentives like these may not always be in the best interest of shareholders.
Who is the Ideal REIT Investor?
Due to their ownership and management of high-value real estate properties, REITs are among the most expensive investment options. People who invest in real estate investment trusts tend to be quite well off financially. These financial instruments are suitable for large institutional investors such as insurance firms, endowments, bank trust departments, pension funds, and government agencies.
Retirement Planning
Real estate investment trusts (REITs) are a type of investment that can be beneficial for retirees in more ways than one. You can increase your knowledge by reading the following advice. REIT investing is appealing due to the dividends they distribute to shareholders.
Diverse Property Portfolio Access
One of the best ways to diversify your holdings without taking on more management responsibilities is to invest in real estate. By spreading their investments out, REITs can reduce their vulnerability to market fluctuations. Values of REITs tend to decline less precipitously than those of stocks during market downturns.
Opportunity for Wealth Growth
Real estate investment trusts (REITs) typically generate substantial gains for their backers when their market value rises. In addition, these businesses have a reliable source of revenue because they must distribute up to 90% of their taxable revenues to their owners.
Long-Term Benefits
Unlike equities and bonds, which have a 6-year business cycle, REITs move in tandem with the real estate market. Notably, such shifts typically last for more than a decade, making them attractive to long-term investors. Ultimately, it proves to be a sound financial strategy for saving for old age.
Protection from Inflation
According to studies, real estate investment trusts serve as a hedge against inflation. When compared to purchasing stock options, investing for a term of 5 years is a superior way for investors to hedge against inflation. REIT investing provides a way for investors to access real estate profits without handling property management.
Guidelines for Investing in REITs
Investors can buy shares of a publicly listed REIT like shares of any renowned public company. One of the three options presented below is appropriate.
Stocks
Buying stocks can be a less sophisticated approach to invest in real estate investment trusts (REITs) than other options. Investment vehicles known as real estate investment trusts (REITs) allow people to put their money into property.
Stocks & Bonds Collectively
If people went this route, they could considerably broaden the scope of their financial portfolios. In order to invest in such a fund, investors would need to go through a mutual fund business, as it is an indirect investment vehicle.
Exchange-Traded Investment Vehicles
Aside from the diversification benefits, investors also stand to gain from the indirect property ownership that comes with this form of investment. Real estate investment trusts (REITs) are comparable to mutual funds in that both are investment vehicles. The sole distinction is that real estate investment trusts (REITs) invest in real estate rather than bonds or stocks. Financial advisors can assist REIT investors in making more informed choices regarding which REIT to purchase.
Business etiquette for making and taking transactions Funds that Invest in Buildings and Other Structures. Investors can purchase shares of a publicly traded REIT through a broker. Only brokers participating in the offering can sell shares of a non-traded REIT. Alternatively, you can invest in a real estate investment trust by purchasing shares of an exchange-traded fund or a mutual fund that tracks a portfolio of REITs.
Costs & Duties Calculation Methods
Investing in a publicly traded REIT is something a broker can assist you with. It is usually possible to invest in a REIT by purchasing its common shares, preferred stock, or a debt security. The broker includes commissions. Brokers or financial advisers generally sell non-traded REITs. Many non-publicly listed real estate investment trusts charge steep front-end commissions. Around 9–10% of investments go toward sales commissions and front-end offering costs. There is a significant reduction in value due to these expenditures.
As a matter of special tax consideration, REITs typically distribute at least 100% of their taxable income to their owners. To the extent that a REIT’s shareholders receive dividends or capital gains, the distributions and gains are subject to taxation by the shareholder. REIT dividends are usually taxed at standard income rates, not the lower rates for other corporate dividends. You should probably consult a tax professional before buying real estate investment trusts.
Conclusion
Suspect anyone trying to offer real estate investment trusts (REITs) without SEC registration. Both publicly traded and unlisted REITs’ registration statuses can be verified using the SEC’s Electronic Data Gathering and Analysis System (EDGAR). In addition to researching the REIT itself, you should learn more about the broker or investment advisor that recommended it.
Please refer to the section on Collaborating with Brokers and Investment Advisors for further information. By now, you should have a firm grasp on the who, what, and how of investing in real estate investment trusts (REITs). Stay up-to-date with the latest research on what is a REIT topic by reading this recent article.