Real Estate Investment Trusts (REITs) Explained
What are REITs?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs allow individuals to invest in real estate without having to buy, manage, or finance any properties themselves.
Types of REITs
Equity REITs
Equity REITs own and operate income-producing real estate properties. These properties can include residential, commercial, retail, or industrial real estate.
Mortgage REITs
Mortgage REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities.
Hybrid REITs
Hybrid REITs combine the characteristics of both equity REITs and mortgage REITs, investing in both real estate properties and mortgages.
Benefits of Investing in REITs
- Diversification: REITs provide investors with exposure to a diversified portfolio of real estate properties.
- Liquidity: REITs are publicly traded on stock exchanges, allowing investors to buy and sell shares easily.
- Income: REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
- Tax advantages: REITs are not taxed at the corporate level if they distribute at least 90% of their taxable income to shareholders.
Risks of Investing in REITs
- Interest rate risk: REITs are sensitive to changes in interest rates, which can affect their borrowing costs and property values.
- Market risk: REITs are subject to market fluctuations, which can impact their share prices.
- Property risk: REITs are exposed to risks associated with owning and operating real estate properties, such as tenant vacancies and property damage.
How to Invest in REITs
- Open a brokerage account: To invest in REITs, you will need to open a brokerage account with a financial institution.
- Research REITs: Research different REITs to find ones that align with your investment goals and risk tolerance.
- Purchase REIT shares: Once you have identified a REIT to invest in, you can purchase shares through your brokerage account.
- Monitor your investment: Keep track of the performance of your REIT investment and make adjustments as needed.
