Investing in real estate at the right time and place can result in substantial returns. However, numerous factors can influence your venture’s potential success. Issues such as unstable market conditions, limited supply, and barriers to immediate funding can result in loss and missed opportunities. Some investors may also begin projects and later run into problems raising the contingent principal needed for completion. Additionally, not everyone looking to invest in real estate has the money to buy multiple properties. One alternative for someone looking to invest in real estate without making a traditional purchase is to invest in a real estate investment trust (REIT). If you are considering this type of investment, you will want to know: What is a real estate investment trust (REIT)?
What are Real Estate Investment Trusts (REITs)?
Real Estate Investment Trust or REITs provide an investment option in commercial property without requiring that investors purchase the structures themselves. REITs are similar to a mutual fund for real estate. Rather than owning massive property holdings, several investors pay to hold an interest in companies that own multiple income-producing commercial properties. These buildings may be apartment complexes, office buildings, retail centers, warehouses, hotels, and other commercial spaces. Someone investing in a REIT invests in the company that owns a specific group of properties rather than the real estate itself. The IRS requires that REITs return ninety percent of shareholder income in dividends each year. Therefore, REITs can be attractive to investors looking to see a more significant return.
Different Types of REITs
REITs can be classified in different categories according to how their values are represented. The three basic types of REITs are equity, mortgage, and hybrid. REITs are also classified according to how they are traded. There are publicly-traded REITs, public non-traded REITs, and private REITs.
- Equity REITs- As the name implies, equity REITs are connected to property equity. Their value is centered on flipping, selling, managing, and maintaining real estate. These companies own, manage, and maintain, the subject properties and collect monthly rent.
- Mortgage REITs- Mortgage REITs are based on mortgage investments and lending products. These companies buy mortgage-backed securities and existing mortgages and lend money for mortgages. Instead of owning the physical properties, they own the debts associated with the real estate. Due to changing interest rates and housing-market conditions, mortgage REITs can be considered higher-risk investments, and tend to pay higher dividends.
- Hybrid REITs – The third type of REIT, the Hybrid REIT, involves a combination of both equity and mortgage REIT investments.
Are REITs a Good Investment Option?
Depending on the market, and the type of REIT you select, a REIT investment may produce consistent returns. Because REITs must pay ninety percent of their annual income as shareholder dividends, they pay some of the stock market’s highest dividend yields. Another benefit of REITs is that they are ordinarily more liquid than traditional real estate. For example, selling a publicly-traded REIT is usually less involved than waiting for a real property sale to close. Additionally, because REITs involve multiple investors, a single investor doesn’t have to raise as much capital to invest.
On the downside, unlike property owners, REIT investors don’t have control over what happens with the investment properties or products. They are also at the mercy of market volatility. Factors such as low occupancy rates and property supply and demand can diminish investment values. Further, not all REITs have the same liquidity. Investors who choose publicly-traded REITs versus non-public and private REITS will probably find that these assets are more liquid.
If you are considering investing in a REIT, you should discuss the matter with an experienced financial advisor and a California real estate attorney. These professionals can provide valuable insight and advice regarding this investment option.
Contact the Law Office of Raffy Boulgourjian
Attorney Raffy Boulgourjian is a California real estate attorney with over twenty years of experience representing clients in residential and commercial real estate matters. He has the knowledge and expertise to protect your real estate interests. Contact Mr. Boulgourjian today to schedule a free legal consultation to discuss your California real estate legal needs.