Investing in physical real estate isn’t as straight forward as investing in financial assets trading on exchanges, but has many benefits. And Real Estate Investment Trusts, or REITs, let investors invest in a publicly-traded real estate company. Mutual funds specialized in real estate and/or REITs offer broader diversification for a fee.
Buying physical properties or buildings is time consuming, requires taking on debt, paying broker commissions, and requires long holding periods. But there are significant tax benefits (the properties can be depreciated), income-producing opportunities for renting out these assets, and appreciation potential. They also perform well in high inflation environments.
For more liquid opportunities, a single REIT can let an investor gain exposure to the underlying properties this entity holds. A tax complication could be receipt of a K-1 tax form, which can delay paying taxes from earlier in the year. But these are stocks with ticker symbols that can be sold and cash received in three days total. REITs also don’t pay taxes as long as they pay out 90% of income to shareholders.
REITS fall into three main categories:
Equity REITs - Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.
Mortgage REITs - Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest they earn on the mortgage loans.
Hybrid REITs - Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages
Objectives and Risks
Investors seeking income, inflation hedges, and appreciation potential would be well served by buying a rental property or investing in a REIT or real estate fund.
There are still significant risks involved in holding physical real estate. Property taxes, maintenance expenses and repair costs are just some of the costs of holding the asset. Furthermore, real estate is considered to be very illiquid - it can sometimes be hard to find a buyer if you need to sell the property quickly.
How To Buy or Sell It
Real estate is almost exclusively bought through real estate agents or brokers. Their compensation usually is a percentage of the purchase price of the property. Real estate can also be purchased directly from the owner, without the assistance of a third party. REITs trade just as common stocks do.
Strengths
Income production
Appreciation potential
Inflation protection
Weaknesses
Illiquidity of physical real estate
Real estate investing requires debt
Tax benefits, but can be complicated
Key Considerations
Liquidity: High (for REITs and funds)
Historical Returns: High
Inflation Protection: High (among the best out there)
25 Investments: Real Estate Investment Trusts (REITs)
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Investing
A Look at REITs vs. Real Estate Mutual Funds (ESRT, TRREX)
REITs and real estate mutual funds have their differences, yet they both offer liquidity and easy access to diversified real estate assets. -
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REITs vs. REIT ETFs: How They Compare
Learn about the difference in investing in a REIT for a single real estate company versus investing in a REIT ETF that tracks a larger REIT index. -
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The REIT Way
Ever considered investing in real estate? A real estate investment trust – or REIT – buys, develops, manages and sells assets in real estate. -
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A Guide to Real Estate Investing
Investing in real estate is a popular choice for good reasons, but it's more complicated than owning your typical stocks and bonds. -
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Direct Real Estate Investing Versus REITs
When considering whether to invest in a REIT or through direct investment in real estate, consider the amount of risk and responsibility you can handle. -
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Are REITs Beneficial During A High-Interest Era?
Historically, REITs have remained independent of interest rates, making them a good alternative to more sensitive stocks and bonds. -
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The 5 Best Real Estate REIT ETFs of 2018
These ETFs may be a solid investment for those who want real estate exposure without the headaches. -
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7 Sectors for Diversified REITs
An overview of the different types of property that REITs own.