What are REITs and How to Invest in Real Estate Investment Trusts?

Would you like to become the owner of high-end real estate? Maybe, you are interested in earning regular income and growing your money? With Real Estate Investment Trusts (REITs), you can kill all these birds with one stone. Interested in this investment instrument and wondering how to start? Check out the Q Wealth article below to find answers to all your questions.

What is a REIT?

A Real Estate Investment Trust (REIT for short) is an easy way to invest in different real estate, be it residential houses or commercial properties. When you buy shares in a REIT, you get an opportunity to earn regular income from these properties and benefit from expert management services. Simply put, a REIT is a company that owns, runs, and manages various real estate and associated assets.

REITs let you invest in all kinds of properties:

• apartment complexes
• shopping malls
• office buildings
• hotels
• warehouses.

Unlike companies that develop properties to sell them later on, REITs buy and manage real estate as part of their own investment portfolios.

With REITs, real estate investment works the same way as any other investment instruments (e.g., stocks, bonds, futures, or cryptocurrencies).

REITs first appeared in 1960 when the U.S. federal government allowed investors to buy commercial real estate. Still, it is only within the last decade that they’ve become popular with investors.

REIT types

REITs come in all shapes and forms:

• Publicly Traded REITs: These are listed on major stock exchanges like the New York Stock Exchange (NYSE). Any investor with a brokerage account is free to buy the shares of Publicly Traded REITs. Regulated by the U.S. Securities and Exchange Commission (SEC), they must submit audited financial reports thereto.
• Public Non-Traded REITs: Although they are not listed on stock exchanges, investors can still purchase Public Non-Traded REITs via financial advisors or online real estate crowdfunding platforms. Public Non-Traded REITs are also registered with the SEC and file financial reports.
• Private Non-Traded REITs: These trusts are usually for wealthy investors only. They do not welcome the general public. Unlike the above two, Private Non-Traded REITs are not obliged to register with the SEC or submit financial reports.

Within these REIT types, you will find three subtypes that are classified based on the assets they hold:

• Equity REIT: These trusts own income-generating properties like office buildings, apartment complexes, and warehouses.
• Mortgage REITs (mREITs): They invest in real estate, grant loans, or purchase mortgage-backed securities, earning income mainly from interest.
• Hybrid REITs: Trusts of this type invest in both properties and mortgage-backed securities directly.

Why invest in REITs

As a REIT investor, you will enjoy attractive benefits:

• Steady Dividend Income: REITs generate steady income and give you financial stability even when inflation is high.
• Shares That Are Easy to Buy and Sell: Most REITs are traded on stock exchanges, so you can quickly buy and sell their shares whenever you need to or feel like.
• Transparent Regulated Transactions: REITs are closely monitored by financial regulators. They submit audited financial reports. This way, you get important information about taxes, property ownership, and zoning rules.

REIT investments: risks

The U.S. Securities and Exchange Commission often warns investors about fraud risks in the REIT sector. Unregistered REITs may sometimes be scams, so you should be careful who you trust your money with.

To protect your investments, always check the reputation of both publicly traded and non-traded REITs using the SEC’s EDGAR database. There, you will find both annual and quarterly reports submitted by these trusts. It also pays to check the credentials of those investment advisors and brokers who recommend you invest in specific REITs.

Here are some other risks to consider:

• Income from REITs may be taxed as ordinary income.
• REITs are highly sensitive to changes in mortgage interest rates.
• The liquidity of the underlying real estate assets may vary. 
• REITs at times incur high transaction fees and property management costs.

Some REITs finance property acquisitions by taking on debt. Before you invest in the chosen REIT, check its debt-to-equity ratio. This way, you will avoid putting your money into a trust that is overleveraged and at risk of financial instability.

Investing in REITs: this is how you do it

Both natural and legal persons can invest in publicly traded REITs through stock exchanges. For non-traded REITs, you’ll have to collaborate with a broker or use online real estate crowdfunding platforms.

All publicly traded REITs have websites where investors can find the corresponding financial reports, property details, and other important information. The most common way to invest in REITs is through exchange-traded funds (ETFs) that track REIT indices.

Below, you will find some valuable recommendations from Q Wealth for newly-minted real estate investors willing to succeed:

1. Start with publicly traded REITs

For newbies, publicly traded REITs are a great way to start investing. Unlike private REITs, which need special approval and thousands of dollars upfront, publicly traded REITs are easier to get into. You can start by purchasing shares of the trust you are interested in. Yet, just like with any new project, it pays to do your research before you invest in REIT. This is what deserves the most attention on the part of novice investors:

• fund’s management team
• REIT’s property portfolio
• whether the REIT in question has any debts
• REIT’s history of dividend payments
• fees for buying and selling shares
• fees for investment portfolio management (these affect overall returns).

2. Gradually increase your investments

The Q Wealth team recommends you start with a small amount of REIT assets. Around 2 to 5 percent of your investment portfolio is enough. As you become more experienced, it makes sense to study the real estate market better. This way, you will learn to pick properties with high investment potential. The next step will be to calculate how much income you can earn and understand what affects the prices.

Q Wealth has years of experience in international property management. You are welcome to turn to us to pick a reliable REIT or find out how to diversify your portfolio. Should it become necessary, you can also place it under management.

Financial advisors often recommend that a share of real estate in a well-diversified portfolio make 5% to 15%. Because the real estate market goes through cycles, you will successfully reduce risks and improve long-term stability if you grow your investments step by step.

3. Diversify your investment portfolio

Diversifying your investment portfolio with different types of real estate (e.g., residential and commercial properties) helps you spread money with due account of the market situation.

For beginners who want to reduce risks when investing in real estate, mutual funds and REIT ETFs fit the bill. Compared to investing in single REITs, they offer more variety and lower risks. Both fund types give you access to multiple properties. Remember though that each one comes with its own specifics that should be accounted for:

• REIT Mutual Funds: These are managed by experts who choose and adjust assets to make the most of market trends and earn profits.
• REIT ETF: The exchange-traded funds of this type are either managed actively or simply follow an index. For example, the Pacer Benchmark Industrial REIT ETF invests at least 85% of its money in industrial real estate, say warehouses and distribution centers. Pacer managers constantly monitor the market, focusing on assets they think will grow in value soon.

4. Monitor market trends

Would you like to invest smartly? Be sure to follow the latest market trends. Keep an eye on loan interest rates, inflation, and unemployment levels, among other things. These indicators impact real estate prices to a great degree. In turn, these price fluctuations translate to changes in investment liquidity. 

On a final note

REITs are a fantastic tool to diversify investment risks and, at the same time, enjoy a steady income. These funds give you access to various real estate types. The most obvious advantage is that you don’t have to buy properties or invest large amounts of money. Plus, you can use REITs to hedge inflation-related risks.

Ready to proceed? Hold on a second. Your first move should be market analysis and risk evaluation. Besides, it pays to study all the information you can find about the REIT itself. If this is your first time trying to enter the real estate market or invest in properties, act smart and contact Q Wealth experts for professional assistance.