Wednesday, February 24, 2016
REITs are a method of investing in real estate which are classified as being focused on the aspects of property that resemble the “make and model” of a car. When investing in an REIT, you invest directly in the property involved, meaning that you don’t run the risk of a bad commercial investment in the traditional way.
The standard method by which people invest in real estate is to sink large sums of money into the property in question right off the bat. If the investment was a bad one or if it was badly managed, this more capital focused form of investment is going to result in large losses on the investors’ end. With an REIT, you run the same type of return, but the risk is almost negligible in comparison to standard methods.
When one of these trusts is traded publicly, it is sold on the exchanges in the same way that stocks are. These trusts can hold property, mortgages or a combination of both. While the contents of the trust may differ from one to the other, they are always going to be involved in real estate in one way or another.
These assets owned by the trust are usually more commercial buildings and properties, because of their higher risk and return. These include things like malls, apartment blocks, hotels, warehouses and even hospitals, for the right price!
How it Works
They work in the same way that traditional trusts do, in that they have a board of people overseeing the decisions pertaining to the management of the trust. The company has a collective pool into which all earnings are deposited via an IPO. The collected earnings is then used in different ways to manage the properties owned by the trust, including buying, selling and development. The money is returned though things like income, rent and the selling of shareholder equity.
A major advantage of owning an REIT is that the money is distributed to you on a regular basis. Up to 90% of the income of the trust properties is distributed to the holders. In addition to this, only one tax is added to it, because the rest is taxed on an annual basis.
When REITs are not publicly traded, they are considered to have a high liquidity, aren’t volatile, and aren’t as closely tied to the current prices of stocks on the market. This means that a crash in the market won’t impact the REIT as much as it does any other investments on the exchange.
Choosing a Good REIT
A list of all the REITs that are publicly traded on the market are found on the official website. Of course, no two REITs are the same, and it would be best to choose one more suited to your own preferences. Choosing a good one also involves looking at how well the trust has been managed till now, as well as how diverse it is.
A lot of people will simply choose to forgo the REIT in favor of the more traditional form of investment because they feel safer. However, it is always best to go for the logically safer option, which in this case is definitely the trust.