Real estate investment trusts (REITs) can be done in various ways, and each investor needs to figure out which suits them best.
Generally, property purchases are the easiest and most direct method of investing in real estate. Investors who purchase and manage property directly can earn excellent returns and gain important tax benefits, but not all have the time, expertise, and resources to do so.
In such a case, purchasing shares of a real estate investment trust may be a compelling option for fractional ownership. Currently, REIT investing can be done through many different platforms.
However, make sure you familiarize yourself with it before venturing into them, so you'll know what you're getting into.
Table of Contents
REIT is a type of investment vehicle whereby individual investors purchase fractional shares in a portfolio of commercial real estate assets.
There are many types of REITs, including privately held and publicly traded ones, and many are focused on specific asset classes. It is not uncommon for REITs to invest primarily in retail properties, while others may look at the office and multifamily properties.
In general, REITs fall into four categories:
The majority of commercial real estate investment trusts exist as equity REITs—and they own equity in multiple properties across a diversified portfolio.
A pro-rata portion of the profits and cash flow generated by the underlying assets is distributed to investors. Shops, data centers, self-storage facilities, and healthcare facilities are common asset classes for equity REITs.
The mortgage REIT (mREIT) provides financing for the purchase of real estate assets. While they are more likely to invest in residential mortgages than commercial real estate, they can purchase any kind of income-producing property.
A public, non-listed REIT is registered with the Securities and Exchange Commission (SEC) but not traded on public exchanges.
As they cannot be sold on public exchanges, they don't have a high degree of liquidity, but they sometimes specialize in specific asset classes.
There is an exemption from the SEC's registration requirements for private REITs, or non-traded REITs, if they adhere to certain regulations, including only selling shares to accredited investors.
In contrast to publicly traded REITs, they are less liquid since their shares are not traded on public exchanges.
REIT Vs. real estate crowdfunding is very popular among investors, whether they are individual or institutional. The reasons for this are extensive, as REIT investors enjoy a number of benefits.
A few of the most important ones will be discussed below.
Diverse portfolios can reduce an investor's risk by spreading their money across different assets and sectors. It is possible to diversify a person's investment portfolio by investing in a REIT.
A REIT is not a stock, bond, or money market but rather a class of its own.
By law, REITs are required to distribute at least 90% of their income to their stockholders.
There is no restriction on the management of the REIT from paying more than 90%, but they cannot pay less than that percentage. In addition, investors may be attracted to REITs because of the possibility of earning consistent and higher dividends.
A significant tax advantage for REITs comes hand in hand with the 90% payout rule — they don't have to pay corporate taxes.
As a point of comparison, many dividend stocks pay taxes twice, once corporately and once individually. For investors, not paying a corporate tax can mean a higher payout.
It is important to note that REITs are investments in real property. In the long run, those tangible assets may increase in value. The fact that an investment is not simply a piece of paper or a slice of a corporation can also put some people at ease.
REITs are relatively liquid compared to investment properties. The process of buying and selling a REIT is much faster than that of a rental property. There is no need for a FOR SALE sign when selling REITs—all it takes is a click of a button.
It is important to remember that no investment is risk-free, including REITs. When it comes to REITs, investors should keep the following in mind:
Unlike other investments, REIT dividends are typically taxed more heavily than other investments since REITs do not pay a corporate tax. A dividend is usually taxed at the same rate as long-term capital gains, which for most people, is lower than the tax rate they pay on their regular income.
Dividends paid by REITs, however, typically do not qualify for the capital gains rate. The dividends from REITs are more often taxed at the same rate as ordinary income.
Several factors influence investments, but interest rates can have a particularly significant impact on REITs. REIT stocks can suffer from rising interest rates.
Generally, REIT values are inversely correlated with Treasury yields—so when the Treasury yield rises, its values fall.
As opposed to other investments, REITs can be subject to property-specific risks. When frozen yogurt or strip malls fall out of fashion, investors may see their investment take a hit if they invest in a REIT that owns frozen yogurt shops.
Investing is subject to trends, but REITs can be influenced by smaller ones that are unique to a location or type of property.
Many investors find that REITs offer more benefits than their drawbacks. However, before making any REIT investing, you need to fully understand it. Making an informed decision about investing in REITs will be easier if you know the advantages and disadvantages listed above.
The next step in your REIT investment is to work with an expert team, and you can count on us for help. The REIT sector is one of our specialties, and we thoroughly inspect all properties we select for investment, providing you with greater security.
Leverage the expertise of our REIT team. Contact us at 949-881-7128 at Saint Investment Group today!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.