There are many avenues you can take in investing in real estate, but a growing trend is to invest in a REIT. A real estate investment trust, or REIT, can help you invest in promising projects without getting your hands dirty on the ground level. This guide can help you learn more about what to expect, so you’ll be better prepared for your first REIT.
What is a REIT?
A REIT is a trust that’s owned and managed by a single company, providing investors with an easy way to fund and benefit from commercial rental units and other income-producing properties. A REIT is similar to a mutual fund in that it uses the resources provided by multiple investors to fund the accounts associated with the REIT. The investors receive dividends based on the property’s income, although each investor’s return will vary based upon the amount of their investment.
There are three primary kinds of REITs, so investors can choose a particular niche that appeals to them. An equity REIT focuses on rental properties that are leased to tenants. The investors’ dividends are taken from the rent payments the property manager receives each month. Mortgage REITs provide financing to real estate investors for property development. The investors who back this type of REIT receive dividends based on the interest earned from the mortgage, minus any costs associated with backing the loan. A hybrid REIT combines equity and mortgage properties in a single REIT, allowing investors to benefit from both types of projects.
How Do REITs Work?
REITs can be further divided into subcategories that are based on a particular industry. For example, one REIT fund may only contain properties in the healthcare industry, such as hospitals, clinics, and private doctor’s offices. Another fund may focus on telecommunications, allowing people to invest in cell towers and other commercial real estate associated with telecommunications businesses.
Typically, REITs are traded through a broker or a financial advisor, although you can invest in some REITs directly. Many retirement portfolios also contain REITs as a way of diversifying the account holder’s investments.
While REITs offer a great way to grow your wealth through real estate, they do have drawbacks. Primarily, it’s a complicated process to liquidate your investment in a REIT, so you shouldn’t expect easy access to your funds. There are also tax issues that your financial advisor should discuss with you. While investing in a REIT isn’t for everyone, it can offer an excellent opportunity for meeting your savings and investment goals.
Article originally published 9/16/20 on Medium at: https://medium.com/@danieltarnowski/how-real-estate-investment-trusts-reits-work-ffd1f92fa7aa