What is Real Estate Investment Trust?

Real Estate Investment Trust has been around since the 1960s and was created in the united states after President Dwight D. Eisenhower signed public Law 86-776 sometimes called the Cigar Excise Tax Extension of 1960.

This was when congress decided to allow or give individual investors the opportunity to take part in the returns of large-scale, diversified portfolio of in come producing real estate projects.

Millionaires points out that REITs have outpaced the total annual return of the S&P 500 to 12.6% on 11.9%, respectively over the past five years.

His first real estate investment trust was American Realty Trust, founded by drummers Jay Broyhill, cousin of Virginia USA congressman Joel Broyhill in 1961, who pushed for the creation under Eisenhower.

Now as at 2021, Real estate investment trust has been established in at least 39 countries around the world, Which represents an equity market capitalization of about 1.7 trillion As listed by the global index which includes 490 stock exchange.

Real estate investment trusts allows investors to buy shares in commercial real estate portfolios, something that was previously available only to wealthy individuals and through large financial intermediaries.

What is real estate investment trust

Real estate investment trust are companies that act as investment vehicles for real estate and own, operates, and finance income-generating real estate. They operate as income-producing real estate across a range of property sectors.

It is comparable to mutual funds, allowing both small and large investors to gain access to real estate investments. They hold a wild variety of assets which include warehouses, complexes, office buildings, self-storage facilities, malls, etc.

Real estate investment trusts, modeled after mutual funds, pool the capital of numerous investors which make it possible for individual investors to earn dividends from real estate without having to manage, buy, or finance any property personally.

How to invest in real estate investment trust

You can invest in real estate investment trust through public trades, REIT mutual funds and REIT exchange-traded funds(ETFs) which is done by purchasing shares through a broker.

It is not very much different from trading on the stock market. They are modeled after the same mutual funds which most people are familiar with. Shares of a non traded REITs can be bought through a financial advisor or broker who participates in the non trade REITs offering.

It includes also, a growing number of defined benefits and defined contribution investment plans. According to Narite, a W.O.C based REIT research firm, Estimated numbers of 145 million U.S. investors have real estate trusts, either directly or through their retirement savings and other investment funds.

Money spent on shares is usually used by the respective REITS to invest in the assets they choose, while investors contribute the money, real estate investments trust decide what to do with the money.

Real estate investment trusts, most importantly, give investors the opportunity to take advantage of this historically prosperous real estate market without needing to take a loan and the interesting part is that they allow investors to invest in real estate without having to acquire physical assets, all investors needs to do is sign up with a brokerage, mind due diligence and invest wisely.

Do not forget that, just like every other investment vehicle, investing inrealal estate investment trust comes with its own risks which investors should know about, which is why proper research, education and understanding is advised but despite clear risk, a well-devised investment strategy will potentially yield years of lucrative profits. This is the ultimate guide to real estate investment trusts.

5 types of real estate investment trusts and how to invest in them

Office REITs
Mortgage
Residential REITs
Healthcare REITs
Retail REITs

Office Real Estate Investment, Trust: Invest in office buildings, and receive rental income from tenants who have usually signed a long-term lease. There are some questions one should ask while thinking of investing in an office real estate investment trust, they include:

How is the area in which the real estate investment trusts invests doing economically?
What is the economical state and how high is the unemployment rate?
How much capital goes into acquiring REITs?
How high is the vacancy rate?

While investing, look for REIT that invests in economic strongholds.

Mortgage real estate investment trust

This provides financing for income-producing real estate by buying or originating mortgages and mortgage-backed securities, earning income from the interest of the investments. It helps provide liquidity for the real estate market.

10% of REIT investments are in mortgages as opposed to the real estate itself. Two of the best-known mortgage REITs investments are Freddie Mac, and Fannie Mae, which are government-sponsored enterprises that buy mortgages on the secondary market.

Mortgage REITs get their capital through secured and unsecured debt offerings. If the Interest rate rises, future financing becomes more expensive, thereby reducing the value of a loans portfolio.

If an environment with a low-interest rate has rate-rising prospect, most mortgage REITs trade at a discount to net asset value per share, you just have to find the right one.

Residential REITs

This is a real estate investment trust that owns and manages various forms of residence and rents space for tenants. This kind of REIT specializes in apartment buildings, manufactured homes, student housing, single-family home, multi-family rental apartments, etc.

There are things to consider while looking to invest in this kind of REIT and they include the best apartment market which tends to be where home affordability is lower than the other parts of the country.

For example, in places like Los Angeles, New York, etc. the high cost of single homes compels people to rent, which causes landlords to raise the prices each month, which is why the biggest residential REITs tend to focus on bug urban centers. Residential REITs thrive in areas where apartment supply is low while demand continues to rise.

Healthcare real estate investment trust.

Healthcare investment trust manages a variety of healthcare related real estate while collecting rent from tenants. They invest in the real estate of medical centers, hospitals, nursing facilities, and retirement homes and its success is directly tied to the health care system.

Operators of these facilities rely on the occupant’s fees, Medicaid and Medicare reimbursements as well as private pay. Necessary things to look out for in a healthcare REIT are investments in several different property types as well as diversified groups of customers.

While looking to Invest in Healthcare REITs, Be sure to look for companies whose health care experience is significant, whose balance sheets are strong, and whose access to low-cost capital is high.

Retail real estate investment trusts

This real estate investment trust represents the single biggest investment in America.

24% of REIT Investments are in shopping malls and freestanding retail. You should be sure to examine the retail industry itself, if it is financially healthy presently and what the outlook for the future is.

The money is made from the rent paid by tenants. If tenants or retailers are experiencing cash flow problems due to poor sales, delay is possible, even default in monthly payments, eventually being forced into bankruptcy, which leads to needing a new tenant, and it’s never easy to get one.

This is why you need to invest with a strong retail REITs Company with the strongest ankle tenants possible. Like whom improvement stores, grocery stores, etc.

Pennsylvania Real Estate Investment Trust

Pennsylvania real estate investment trust is one of the real estate investment trusts that might be undervalued because its value score of A indicates that it would be a good pick for value investors. Its financial health and growth prospects demonstrates its potential to outperform the market and it currently have a growth score of D. It is a self-managed/self-administered real estate investment trust (REIT). Their primary business is owning and operating retail shopping malls.

Washington Real Estate Investment Trust

This is another self-managed, self-administered real estate investment trust that’s owned and manages commercial real estate, mainly in the great metro region of Washington. They own a diversified property portfolio. Spanning approximately 3.9 million square feet, which includes about 15 office buildings, 10 retail centers, and nearly 6,660 residential units, as well as land held for developments and generates nearly 55% of its revenue from office properties.

Structure of REITs

REITs R corporations that is organized to invest in real estate, with capital being raised from public markets or from private investors. There are three main forms of real estate investment trust and they include:

Constructing their own properties and renting them out
Offering mortgages to property owners
Buying of existing real estate properties like apartments, office buildings etc and renting them out.

Features of REITs

for a corporation to qualify as a REITS, It must meet certain requirements, which include:

Having at least 100 shareholders and five or fewer of them can’t hold a majority of shares.
Real estate, cash or U.S. treasuries comprise of 75% of it’s assets.
90% of its income must be paid to shareholders as dividends.
Rents, real estate sales or mortgage interest provides 75% of its income.

Different equity structure of REITs

The two basic REITs are:

Mortgage: which generates income through collecting interest on mortgages while making mortgages to property owners.
Equity REITs: these invest in real estate that will produce income via rent or leasing of real property. There are several ways REITs can generate capital and they include:
Registering office stock with the SEC, selling it to the public but choosing not to have the stock listed on a stock exchange. Though it will be less liquid to the shareholders but still be a good investment.
Marketing is stock to private investors.
Going public by registering a stock offering with the SEC and listing the stock listed on a Stock Exchange which can be bought and sold in the secondary market, creating liquidity for investors.

Pros and cons of REITs

just like every other investment, REITs Has it’s pros and cons but the pros outweighs the cons.

Pro

It is a very transparent investment due to the fact that it is being regulated by SEC, which makes sure that REITs Divulge important information like any reports and this makes it easy for investors to know what to expect outside predicting the actual market itself.
It gives high income, since 90% of the income has to be paid out as dividends which is what gets it classified as a REIT.
REITs Remains liquid due to their placement on most major stock indices. The money investors have in REITs can be accessed relatively quickly and easily, unlike physical real estate.
It has good hedge against inflation, due to the fact that real estate does not go through the same cycles as investments in stocks and bonds.
It gives investors the access to buy into not just different industries but also different REITs, because it does not go through the same cycle as investments in stocks and bonds. You can invest in everything, from commercial properties to apartment buildings, there is no limitation to what you can invest in.

Cons

Even with so much benefits, REITs Also has its own disadvantages and here are some of them listed below

Some of the dividends gotten by shareholders are taxed at regular federal income tax rate
How well a REITs dose is strictly tide to the interest rate, in other words if the interest rate is high, then it will do well, bought if it is slow, then there is a problem.
Real estate investment trusts has limited growth potential especially when a real estate investment trusts can’t rent out its properties because of economic recession.
Real estate investment trusts can have high transaction fee and management.

List of real estate investment trust in USA

Digital
NYSE:DLR
NYSE: CCI
American Tower Corporation
NYSE: PSA
NYSE: AVB
Welltower Inc.
Equinix
Prologis
NASDAQ: EQIX
NYSE: EQR
Simon Property Group
Extra space storage Inc.
Ventas
NYSE well
American campus communities
SBA communications corporation
Realty income corporation
Avalon Bay communities
Boston properties
Federal Realty investment trust
NTSE: SPG
Essex property trust

Can you lose money on a REIT?

Like every other investment, REIT is a risk because, there is no concrete certainty as the real estate marked is always fluctuating.

Public trade REIT has the special risk of losing value, as interest rate rises, which straight out sends investment capitals into bonds.

FAQ

What is REITs?

This is an abbreviation for real estate investment trust which is an avenue for individuals to easily invest in real estate which rewards investors with and attractive alternative to traditionally existing strategies of making money.

Do REITs have to pay dividend?

Yes they are required to distribute at least 90% of their taxable income to their shareholders annually. The dividends are fueled by a stable stream of contractual rents paid by tenants on their properties.

Is REIT worth it?

Well being a total interest return investment, it is safe to say that they are worth it. They provide high dividends plus the potential for moderate, long term capital appreciation.

Conclusion

Real estate investment trusts investing strategies should be included in most well diversified portfolios because of its ability to reward investors with both growth and dividend income which cannot be replicated.

So if you have been toying with the idea of investing in REIT, we hope that the information provides above can be helpful. And do not forget to invest wisely.