Real Estate Investment Trust REITS
What is a Real Estate Investment Trusts Investor?
A real estate investment trust (REIT) is a company that has ownership in income-producing real estate that offers investment opportunity through their real estate stock portfolio. A REIT typically combines the money of multiple investors to acquire a collection of real estate. Like, a mutual fund, participating investors in a REIT do not own the actual real estate properties, they own a share of the fund that owns the properties. A REIT investor’s goal is to receive rental income from the properties as well as benefit from price appreciation.
Some REITs are publicly traded where share price and dividend yield is readily available online. Other types of REITs, for instance that do not trade on an exchange, require investors to buy shares directly from the real estate company offering them.
Becoming a REIT investor is like becoming a shareholder: you don’t manage the properties or make investment decisions in the buying or selling of the properties. The fund’s management team handles the business end ranging from property management to managing the financial aspects that generate profit. While REIT investors are not allowed to make financial decisions, one great advantage is that they gain exposure to large real estate deals that otherwise would not be available to a single investor.
Example of a Real Estate Investment Trust
There are two main types of REITs: Equity and Mortgage REITS. An equity REIT owns and manages real estate properties. An equity REIT first buys and leases properties to tenants, then overtime with appreciation and some value-add projects, the fund’s management team aims to sell property for a profit. Mortgage REITs do not own real estate properties. They own the debt via mortgages, mortgage REITs are dependent upon real estate owner's repayment at the mortgage level.
An example of an Equity REIT is as follows: a company that owns a new development of luxury apartments in a growing city. This company allows people to invest in a REIT to gather the necessary capital needed to operate the real estate venture. Over time, let’s say the city grows and young professionals move in and out of the apartments. Rent from these tenants allows the REIT to pay out dividends. Over a ten-year period let’s also say that the economy has boomed, and now the REIT is in a very good position to sell and maximize returns for its investors. This is the basic lifespan of an equity REIT from start to finish.
An example of a mortgage REIT is as follows: Let’s say a mortgage REIT raises 5.2 million from investors and borrows an addition $35 million at 2.3% interest to buy up mortgages paying 4.5% interest. The difference between the interest income and the interest expense is the profit that could represent anywhere between a 12-16% annual return on investment.
Equity REITS are known for being stable long-term investments, whereas mortgage REITs tend to be volatile. By nature, mortgage REITS are much riskier and unpredictable compared to equity REITs because they are contingent upon the cost to borrow. So, if the cost to borrow increases after the venture has commenced, the profit margin can disappear in an mortgage REIT.
If you like the idea of investing in a mutual fund, then a REIT may be a good investment for diversifying your portfolio with real estate. REITs offer the attraction of 'making money hassle free' to the investor. The goal is for investors to reap the financial benefits of investing without dealing with management or operational side of investment. They get access to balanced real estate portfolios when they own shares of REITs, as invested funds are pooled. Like a mutual fund, the investors in a REIT leave the hard work up to the professionals and industry experts to manage their money for the best possible return. Most REITs have a straightforward process for acquiring shares of ownership, so make sure to do your own due diligence on a REIT and the REIT’s financial team prior to investing.