Real Estate Investment Trusts (REITs) are a type of investment that offers investors the opportunity to invest in real estate without having to purchase and manage property themselves. These investments offer several benefits, including high dividend yields, diversification, and liquidity.
In this post, we will explore REITs in detail and discuss why they should be considered as part of your personal finance strategy.
What is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns or finances income-producing real estate. They are similar to mutual funds but instead of investing in stocks and bonds, they invest in properties such as office buildings, apartment complexes, shopping centers, hotels, and warehouses. These properties generate rental income which is then distributed to shareholders as dividends.
The majority of REITs trade on major stock exchanges like ordinary stocks. There are two types of REITs: equity REITs and mortgage REITs. Equity REITs own physical properties while mortgage REITS buy mortgages on those properties. Both types can provide steady returns for investors through dividends paid out by the trusts.
Benefits of Investing In A REIT
1) High Dividend Yields
One key benefit of investing in a REIT is receiving high dividend yields compared to other asset classes like bonds or cash deposits at banks. The average yield for an equity-based US-REIT was around 4% at the end of 2020 with some reaching over 10%. While the payouts may fluctuate with market conditions or economic changes such as pandemic lockdown restrictions resulting from COVID-19 outbreaks these trust funds typically have higher dividend payments than traditional bonds or savings accounts.
2) Diversification
Another advantage offered by investing in a trust fund is portfolio diversification due to their focus on real estate assets across different sectors such as retail space versus commercial offices that cater to different tenants’ needs. This diversity reduces risk because if one sector of the real estate market experiences a downturn, there are other sectors that may be performing well that can offset any negative impact.
3) Liquidity
REITs offer investors liquidity because they trade on major stock exchanges and have high trading volumes. This means you can buy or sell your shares at any time during regular business hours through your brokerage account. Unlike physical properties where selling them takes longer to complete due to issues such as valuation, legal approvals, and finding suitable buyers.
4) Tax Benefits
Another advantage of investing in REITs is tax benefits provided by law. To qualify as a REIT under US IRS rules, the company must distribute at least 90% of its taxable income as dividends to shareholders annually. This means that REIT investors benefit from lower taxes since these payouts are not subject to corporate taxes but rather taxed only once in the hands of individual investors.
Risks Involved In Investing In A REIT
While investing in a trust fund has many benefits it’s important for investors to understand some risks involved with this type of investment opportunity:
1) Market Risk: As with any equity-based investment option, a decline in real estate prices or market volatility could result in lower share prices for REITs.
2) Interest Rate Sensitivity: Mortgage-backed securities owned by mortgage reits may react unfavorably when interest rates rise causing dividend yields to decrease while making borrowing more expensive which negatively affects earnings from rents collected on properties within the trust funds portfolio.
3) Regulatory Changes: There are regulations governing how much money trusts need reserve depending on their operations size; potential changes could affect dividend payouts if required reserves increase significantly leading trusts’ management teams into reducing distributions to shareholders.
How To Invest In A REIT
Investors interested in investing in Real Estate Investment Trusts have several options available:
1) Direct Purchase – You can purchase shares directly from an exchange-traded fund (ETF).
2) Mutual Funds – You can invest in mutual funds that focus on REITs.
3) Real Estate ETFs – Exchange-traded funds (ETFs) are an attractive option for investors looking to buy real estate investment trusts. They offer low fees, high liquidity, and convenience since they trade like stocks on major exchanges.
4) Robo-Advisors – Automated platforms offer a range of diversified portfolios with varying degrees of risk management strategies including exposure to the real estate sector through REIT investments without having to pick individual stocks directly.
Conclusion
REITs provide investors with a way to invest in real estate without having to purchase and manage properties themselves. They offer several benefits including high dividend yields, diversification, liquidity, and tax advantages. However, there are also risks involved such as market volatility or regulatory changes which must be taken into account when deciding whether or not this type of investment is suitable for your portfolio. If you’re interested in adding REITs to your personal finance strategy make sure you conduct thorough research before making any decisions.