What is a REIT?
Want to own a stock that pays income like a bond? Want to invest in Real Estate without having to purchase an entire property? Look no further! A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends. As a result, the income generated from REIT’s can equal that of fixed income, but still have the capital appreciation potential of stocks.
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way you would benefit by being shareholder in a publicly traded company, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property. Higher returns with less risk, my favorite investment combination!
An excellent investment option for investing in real estate debt, PeerStreet is a great opportunity to invest in the debt side of real estate. PeerStreet.com
Most REITs are traded on the major Stock Exchanges, but there are also private REITs. The two main types of REITs are Equity REIT’s and Mortgage REIT’s. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties. Owning both the investment side of real estate and lending side of real estate further diversifies your Real Estate Sector risk. Depending on interest rates, the current real estate market and other factors, they are a great way to offset your investment risk.
Today, REITs are tied to almost all aspects of the economy, including apartments, hospitals, hotels, industrial facilities, infrastructure, nursing homes, offices, shopping malls, storage centers, student housing, and timberlands. REIT-owned properties are located in every state, and according to an E&Y study, support an estimated 1.8 million U.S. jobs annually. U.S. REITs have become a model for REITs around the world, and countries around the world have adopted REIT legislation.
After the close of trade on Aug. 31, 2016, Equity REITs and other listed real estate companies were transferred from the Financials Sector of the Global Industry Classification Standard (GICS) to the new Real Estate Sector. The change reflected the growing importance of the real estate sector, and is expected to create a larger and more diverse investor base for the REIT industry. Mortgage REITs remained within the Financials Sector. The creation of this new Sector shows just how big the REIT market has become, and demonstrates how important it is to hold investments across all Sectors.
An interesting alternative to REIT’s is investing directly in the mortgage industry, via companies like Peer Street. Learn more here: Invest Like a Pro at PeerStreet