Basics of Real Estate Investment Trusts (REITs)

REITS

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Real Estate Investment Trusts or REITs is an organisation that owns, operates or finances real estates that produce income. It is modelled after mutual funds, REITs have provided investors with all types of regular income streams.

Historically, REITs have delivered competitive total returns, on the basis of high, steady dividend income and long-term capital appreciation. Since they are comparatively low in correlation with other assets, it also makes them an attractive portfolio diversifier that can help decrease the overall portfolio risk and therefore increase returns.

Why should you consider REITs?

REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels.

Ideally, REITs focus on a particular property type, but some hold multiple types of properties in their portfolios.

REITs have a simple and straightforward business model: The REIT leases space and collects rents on the properties, then it distributes that income as dividends to the stakeholders. Mortgage REITs do not own real estate but finance real estate does. These REITs earn income from the interest on their investments.

Types of Real Estate Investment Trusts

There are various types of REITs, mainly equity and mortgage.

  • Equity REITs

A company that operated or owns income-producing real estate.

  • Mortgage REITs

Mortgage REITs provide financing for income-producing real estate by originating or buying mortgages and mortgage-backed securities and therefore, earning income from the interest on these investments.

  • Public Non-listed REITs

These REITs are registered with the SEC but they do not trade on the National Stock Exchange.

  • Private REITs

The private REITs are offerings that are exempted from SEC registration and the shares are not traded on the National Stock Exchange.

  • Hybrid REITs

These REITs are those that specifically use investment strategies of both equity and mortgage REITs.

Pros and Cons of REITs

Like all investments, even REITs have their advantages and disadvantages. One of the most beneficial features of REITs is that it offers high-yield dividends. They help in portfolio diversification and are also very liquid which, in turn, helps in frequent buying and selling of real estate easily.

Some drawbacks of REITs that the investors should be aware of is the potential tax liability REITs tend to create. They are also very sensitive to interest rates set by the government.

Some drawbacks of REITs that the investors should be aware of is the potential tax liability REITs tend to create. They are also very sensitive to interest rates set by the government. Another thing to know about REITs are they they can fall prey to the risks associated with the property. Also, while REITs are better designed for long term (typically considered to be at least five years), they are influenced by micro-changes in the interest rates and other trends which can make them riskier for a short-term financial goal.

REITs can be lucrative, therefore, depending on your need and what exactly are you expecting out of your investment, and when.

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