What Is REIT And Why Should You Invest In Them

In this post, we will try to encapsulate what is REIT, how they work and why you should invest in them. REITs, or real estate investment trusts, are companies that own and operate real estate in order to generate income. Real estate investment trusts are businesses that manage portfolios of high-value real estate and mortgages. For example, they lease properties and gather rent on them. The collected rent is then distributed to shareholders as income and dividends.

REITs typically provide investors with an opportunity to own high-priced real estate while also earning dividend income to supplement their capital. This way, investors can take advantage of the opportunity to increase their capital while also earning at the same time. Both large and small investors can put their money into this investment option and reap the benefits. Besides that, small investors may attempt to pool their resources along with other investors and invest in large commercial real estate projects. REIT properties include data centers, infrastructure, healthcare units, apartment complexes and so on.

How Does It Work?

In 1960, Congress amended the Cigar Excise Tax Extension to create REITs. Furthermore, the provision allows investors to purchase shares in commercial real estate portfolios, which were previously only available to wealthy individuals and large financial intermediaries. REITs, in general, specialize in a specific real estate sector. Diversified and specialty REITs, on the other hand, may hold a variety of properties in their portfolios, such as a REIT that owns both office and retail properties. Many REITs are publicly traded on major stock exchanges, and investors can buy and sell them like stocks at any time during the trading day. Similar to other highly liquid instruments, these REITs frequently trade in large volumes.

Why Invest In REITs?

REITs have historically delivered competitive total returns through high, consistent dividend income and long-term capital appreciation. Similarly, their low correlation with other assets makes them excellent portfolio diversifiers that can help reduce overall portfolio risk while increasing returns. These are some of the characteristics of real estate investment trusts (REITs).

Benefits of investing in a REIT

We hope you now understand what is REIT, how it works and why you should invest in one. So, now it’s time to comprehend the benefits of investing in it.

● Transparency – For regulatory and reporting purposes, REITs traded on major stock exchanges follow the same rules as other publicly traded securities
● Liquidity – Shares are easily sold and bought in the market due to their liquidity.
● Dividends – Provide a consistent income stream for investors by returning 90% or more of profits.
● Diversification – Having a REIT in an investment portfolio is advantageous when other stocks or securities are falling in value because REITs usually have a low correlation to the performance of other asset classes.
● Performance – commercial properties have historically performed well due to their consistent long-term appreciation.

Different Types Of Real Estate Investment Trusts

In a broader sense, the business REIT categories demonstrate the commitment and propensity to classify them higher. Apart from that, the methods developed to sell and buy shares make it easier to classify REITs. The following are some of the different types of REITs:

Equity

This type of REIT is one of the most common. It is typically concerned with the operation and management of income-generating commercial properties. In particular, rent is a common source of income in this area.

Mortgage

It is primarily involved in lending money to proprietors and extending mortgage facilities. It is also known as mREITs. Additionally, REITs frequently purchase mortgage-backed securities. Mortgage REITs earn money by charging interest on the money they lend to business owners.

Hybrid

This option allows investors to diversify their portfolio by investing in both mortgage and equity REITs. As a result, this type of REIT earns money from both rent and interest.

Private REIT

These trusts operate as private placements, catering to a small group of investors. Private REITs are typically not traded on national stock exchanges and are not registered with SEBI.

Publicly listed REIT

Generally, publicly-traded real estate investment trusts expand shares that listed on the National Securities Exchange and governed by SEBI. Individual investors can buy and sell such shares on the NSE.

Public Non-Traded REIT

These non-listed REITs have registered with SEBI. They are not, however, traded on the National Stock Exchange. Moreover, these options are less liquid when compared to publicly traded non-traded REITs. Plus, they are also more stable because they are not affected by market fluctuations.

How Does A Business Become A REIT?

To qualify as a REIT, a business has to meet a certain criterion, as mentioned below.

● The structure of the entity must resemble that of a corporation or business trust.
● Increase the number of fully transferable shares.
● Is led by a trustee board or a board of directors.
● A minimum of 100 shareholders required.
● Each taxable year, no fewer than five individuals should have held 50% of its share.
● Is required to pay a dividend of at least 90% of taxable income.
● Real estate must account for at least 75% of investment assets.
● Get at least 75% of your gross income from mortgage interest or rent.
● Shares of taxable REIT subsidiaries may not comprise more than 20% of the corporation’s total assets.
● Investments should account for at least 95% of the REIT’s total income.

The Bottom Line

We hope our blog on what is REIT has given you a wealth of knowledge on the subject. REITs make it simple for new investors to get into the real estate market. Dividends, in addition to their other advantages, provide liquidity to an investor’s portfolio. Also, investors seeking real estate exposure should look into these investment vehicles, particularly IPOs. After all, they’re more liquid than physical properties and can be a consistent source of income.

They appreciate (and sometimes depreciate) in tandem with the broader real estate market and provide a hedge against stock market volatility. Do your research before investing and you must also find the best real estate agents who can rightly guide you. For more diverse articles and blogs, keep checking our websites 99Pillars.