Reits are like mutual funds which own properties and generate income through renting, financing and selling properties.
Shares of REITS can be bought on the major stock market exchanges and just like stocks. Investors then receive dividend payments proportional to their stocks.
REITS are a cheaper way to earn from property investments if you can't afford to finance a property such as commercial offices or retail outlets on your own, they do this by pulling the financial resources of a lot of people together and managing properties on their behalf.
Types of reits
Investors own properties and generate revenue through rental income
Mortgage Reits: ✔
These allow investors to own property mortgages(commercial or private) , purchase mortgages from lenders and loan money for mortgages. Profits are made from the interest received on the mortgages
Hybrid Reits combine both equity and mortgage reits.
What you need to know about Reits
The main purpose of REITS is to make the benefits of income producing real estate accessible to anyone.
Reits are liquid assets and usually have great tax benefits based on the regulatory origin of the Reit. In most cases REITS payout over 90% of their earnings to investors as dividends which make then very attractive to investors.
Reits can be private or public. This means you can buy their shares on stock exchanges and for private Reits you will have to contact the REit provider.
In recent times crowdfunded peer to peer investment vehicles for properties have started trading. property partner(the startup) is one of these.
Reits will usually have to meet all these criterias to be considered by most regulatory bodies as a REIT
- Reits are modelled like mutual funds
- Reits generate their income(usually a minimum of 75%) through property management and financing.
- Reits are mostly owned by its shareholders
- Reits will usually need to own its real estate with long term investment goals.
- Reits are usually corporate entities e.g companies.
- Reits will usually need over 90% of its assets to be real estate assets
- Reits will usually need at least 90% of its income to be passive
- Reits must distribute at least 90% of its income to its stockholders as dividends
- Reits can be finance through equity or debt
- Reits offer a lot of diversification
Reits have performed well over a longer period of time by returning double digits, although lower double digits. Reits are therefore more favourable in comparison to most other options such as stocks.
Pros of Reits
Investors don't have to deal with buying properties or managing them. Less headache
Reits have some protection against inflation
Reits usually have great tax advantages
Investors can expect to receive over 90% of income generated
Cons of Reits⛔
Reits take on a lot of debt
Reits have exposure to the stock market and their prices may react to the general stock market price movement
Not all reits have tax benefits
As Reits do not reinvest their income due to having to pay out over 90& of it they don't have much capital to reinvest and hence have a much slower growth rate than other investment vehicles.