Gone are the days when you needed huge capital to get started in real estate. If you have been following our blog, you must have read about real estate investment trusts earlier. In this blog, how to Invest in Real Estate with Little or No Money we gave a summary of real estate investment trusts. However, in this blog, we will tell you everything you need to know about real estate investment trusts.
Several people know about investing in stocks and shares as an investment plan. Unfortunately, they do not know that real estate has a plan that allows you to invest similarly to stocks. In simple terms, it is called a real estate investment trust.
What is Real Estate Investment Trust?
Real estate investment trusts (REITs) are companies that own, finance and manage properties. These companies invest in large-scale income-producing properties like malls, offices and hotels. These investments are done to generate income for unit holders in the trust. By implication, investing in real estate investment trusts enables you to own a share of large properties and divide the risks and benefits with other investors.
Companies that run real estate investment trusts are mandated by the law to pay the bulk of the company’s income to their investors.
What are the Types of Real Estate Investment Trusts?
Real estate investment trusts are categorized in two ways. The first categorization is by their investment holdings, while the second is by trading status. This segment will discuss the different types of real estate investment trusts and their subcategories.
1. REIT Types by Investment Holdings
- Equity REITs:
Equity real estate trusts operate a landlord-tenant kind of relationship. This type of real estate Investment Trust purchases holds and manages commercial and rental properties. They also handle all the risks, management, upgrades and refurbishing duties of the properties in their custody.
Equity REITs’ primary focus is to generate revenues via rent. Hence, they do not engage in sales of properties they own.
- Mortgage REITs:
This kind of investment trusts neither buy, own nor manage properties. Rather, they invest by loaning real estate owners’ money through mortgages and loans. Sometimes, Mortgage Real Estate Investment Trusts invest indirectly in these properties through mortgage-backed security.
Money is earned from the interest charged on the cost of paying for mortgage loans.
- Hybrid REITs:
As the name implies, hybrid real estate investment trusts operate a merger of the Equity and Mortgage real estate investment trusts. By implication, they own some properties while they also invest in mortgages for other properties.
2. REIT Types by Trading Status
Based on trading status, there are three main types of real estate investment trusts.
- Publicly Traded Real Estate Investment Trust
Lovers of stock investment will love the publicly traded real estate investment trusts. Public traded real estate investment trusts are traded on exchanges like stocks and ETFs.
Publicly traded real estate investment trusts are more transparent than other types of real estate investment trusts. They have better governance standards and are easily accessible to investors.
- Public Non-Traded Real Estate Investment Trusts
Publicly non-traded real estate investment trusts are listed publicly on the exchange market. However, they are not available on the exchange. These real estate investment trusts can only be acquired from a broker who trades in a public non-traded offering.
Public Non-Traded real estate investment trusts are highly illiquid and could be difficult to value.
- Private Real Estate Investment Trusts
It is difficult to value and trade Private Real Estate Investment Trusts. These trusts are unlisted and have fewer disclosure requirements. Consequently, making their performance harder to evaluate.
Due to these limitations of private real estate investment trusts, many investors don’t find them attractive. This is partly due to the higher risk rates of Private Real Estate Investment Trusts,
Pros and Cons of Investing in Real Estate Investment Trusts?
Just like every other investment option, REITs has its advantages and disadvantages. Without much ado, let's get started with the pros and cons of real estate investment trusts.
Pros of Real Estate Investments Trusts
- Total Return: Real estate investment is an investment that appreciates over time. As a newbie, starting with real estate investment trusts may be a good way to test the waters. As time passes, real estate investment trusts provide high dividends and long-term capital appreciation. Most especially, if you are investing in publicly traded equity real estate investment trusts.
- Liquidity: Sometimes, physical properties have a lot of risks associated with them. Through real estate investment trusts, you enjoy reduced liquidity risk. Additionally, you get to own a share of commercial real estate without owning the huge capital associated with owning it.
- Portfolio Diversification: Real estate investment trusts offer you an easy way to diversify your real estate portfolio. These real estate investment trusts invest in a variety of properties. Consequently, you are safe from the risk of relying on a single property or tenant which is often the case when you invest directly.
- Minimal Investment Risks: Real estate investment trusts comprise a pool of investors that invest in properties corporately. Hence, the profits and losses are shared as a group. By implication, you do not have to bear a huge investment risk in the case of a business mishap.
- Professional Management: Real Estate Investment Trusts are usually managed by professionals. These professionals understand the market and oversee the day-to-day management of the property. Consequently, the risks of mistakes that could cost the company income are reduced in real estate investment trusts. As such, this is a safe option for you if you are a beginner in real estate investment.
Cons of Real Estate Investment Trusts
- Market Risks: Real estate investment trusts operate similarly to the stock market. Consequently, they are affected by price movements in the financial market, changes in interest rates and recession.
- Choosing the Wrong Real Estate Investment Trusts: As simple as this sounds, this is a mistake some investors make when trading in Real Estate Investment Trusts. Sometimes, real estate investors do not observe the market before investing in their REITS. This sometimes causes them to invest in properties that are declining in value.
- Puts you at the Risk of Fraudsters: The real estate industry generally needs you to conduct your research before investing. Sometimes, because REITs are not physical properties, investors get duped by fraudsters. One way to avoid this is to ensure you only invest in registered real estate investment trusts.
Frequently Asked Questions About Real Estate Investment Trusts
1. What are the Differences Between Listed REITs, Public Non-listed REITs and Private REITs?
Listed Real estate investment trusts are companies that are filed with the Securities and Exchange commissions. Additionally, their shares are listed on the national stock exchanges.
Similarly, public non-listed real estate investment trusts are companies filed with the Securities and Exchange commissions. However, they do not trade on national stock exchanges. Instead, you get their stocks from brokers that trade in public non-traded offerings.
Private Real Estate Investment Trusts neither file with the Securities and Exchange Commissions nor trade in the national stock exchanges. Consequently, you need to be watchful and conduct thorough research when dealing with private real estate investment trusts.
2. What Factors Contribute to REIT Earnings?
Real Estate Investment Trusts' earnings are cumulative of several factors. These factors include higher revenues, new business opportunities and lower costs of property maintenance.
3. What Types of Properties do Real Estate Investment Trusts Own and Manage?
Real estate investment Trusts own and manage several types of property types. These properties range from shopping centres to health care facilities, apartments, warehouses and other types of properties.
4. Who can Invest in Real Estate Investment Trusts?
There are no restrictions concerning investors who can invest in real estate investment trusts. Just like other shares, anyone can invest in real estate investment trusts. However, before investing in real estate investment trusts, you need to have a goal. Similarly, speaking to a financial advisor would go a long way in helping you.
Conclusion
Real estate investment trusts are a safe beginner-friendly approach for you to get started in the real estate market. They operate by pooling resources from several investors and using these resources to invest in capital-intensive high-income generating properties. Hence, all investors share the benefits and the risks of the investment.
In this blog, we examined the definition of real estate investment trusts and the two types of categorization of real estate investment trusts. Additionally, we evaluated the pros and cons of real estate investment trusts. After which, we sealed off the blog with the frequently asked questions about real estate investment trusts.
Land Republic is a reputable real estate company that is committed to helping you invest in real estate without hassles. We have several educating resources about real estate and we are willing to walk you through your real estate investment journey. Do not hesitate to contact us via +2348122222283 and support@landrepublic.co.
