What are REITs and Why Should you Invest in them?

What are REITs and are they a viable alternative to physical real estate. Property Investing for me has always been at the back of my mind. However, I bought my house at the height of the property boom in Ireland. No sooner had I got the keys on my hand when the market completely collapses.

Owning real estate can be a very tricky business. You have to be able to find financing. Choose the right houses to invest in, and wait out the fickle demands of the market.

History will show that it can provide you with decent returns over a long period. In fact it is popular in Ireland because it has more Tax advantages than other investments. (Including Dividend Investing)

A fair question is why don’t I invest in property? I recently wrote a post of Wolf Of Harcourt Streets substack recently which will give you some reasons why. The truth is there are many reasons including a lack of finance.

Luckily for me, there is an alternative and I can invest in Property without the finance needed for physical Real estate.

What is an REIT?

A REIT, or Real Estate Investment Trust gives the average retail investor the opportunity to invest in properties. REITs generally generate income by producing and owning real estate. Usually, they will choose a specific type of real estate to invest in. Examples are apartment complexes, medical buildings, office buildings. This does not stop other REITs from investing in a more diverse array of real estate types. But typically many companies will focus on one or two types of real estate.

REITs can be bought on most major stock exchanges which makes them highly liquid. By investing in REITs, investors are indirectly investing in the real estate the company owns. Like with ordinary shares of a company, investing in REITs usually gives the investor voting rights.

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One of the benefits of investing in a real estate investment trust is the dividend-based income that they pay out to their investors. REITs own or lease real estate property and consequently pay out the income from rent to investors. The idea is that the REIT takes 90% of its profits and gives it to the investors in the form of dividends. Despite these dividends, the value of the REIT can still go up and down just like any other stock.

Requirements for REITs

In order to qualify as a REIT, a company must fulfill certain requirements. For example:

REITs are obliged to distribute most of their taxable income to shareholders. Usually, around 90% has to be distributed.
At least a certain percentage of the assets must be invested in real estate. This is typically around 75%.
At least a certain percentage of its gross income must come from the rent or sale of real estate or the interest on mortgages. Usually, this is around 75%.

Who should invest in REITs?

Should you invest in REITs right now? you will first want to make sure they are suited to your investment style. Due to the fact that you can invest in many real estate investment trusts for $10 or more, they are best suited for people who either insist on a long-term investment strategy or those who want to diversify into something more stable.

These investments are also attractive to those who would like to invest in real estate but are not interested in all of the extra hassles that go along with it. It is almost like the opportunity to be a silent partner in a real estate firm, collecting the benefits while not having to worry about the day-to-day management.

It is not ideal for higher volume or fast money trading such as day trading or options trading. These types of investors may find these types of Investments to be boring and lacking in real returns. REITs can be just as secure of an investment as land or gold as long as the investor does their research and picks the right REITs to invest in.

If you would like to see how I analyse REITs. Check out this article I have done on Vonoiva recently.

What are the advantages over other investments?

I think the main advantage is simple to understand. Dividends are otherwise known as Distributions. You can collect dividends off of the real estate investments made by the fund without having to make the choices in buildings or having to understand real estate. This is ideal for the hands-off investor who would prefer to benefit from the expertise of those who manage the fund.

With an REIT you have a public investment that can be purchased through most retail brokers, the same as any stock or ETF. This makes them easy to find and invest in. The learning curve is also shorter when it comes to learning how to invest in REITs. The dividends are a godsend to the self-directed retirement investor, who can rollover the profits from the dividends back into the REIT, allowing faster gains through compounding. This opportunity for growth puts it above many bonds and mutual funds.

Another positive is the liquidity, especially when compared to conventional real estate investing. It is easier to turn your REIT shares into cash you can spend than it is for any property.

What are the disadvantages?

There are few disadvantages to investing in REITs, except for the fact that just like any other investment you have to rely on the knowledge of the company that you are buying your REIT shares from. Real estate is generally a very fickle business where there are ebbs and flows in the profits generated.

The two ways an investor can benefit from an investment in a REIT are the regular income distributions and a potential price increase. Generally speaking, returns on REITs are from dividends rather than price appreciation. As most income is distributed to shareholders, capital appreciation is often low

Conclusion

With all of this new knowledge you have been given, should you invest in REITs right now? If you are curious, I have published 3 of the Best REITS to think about.

Depending on your goals, investment in a REIT can bring many benefits to the portfolio of the savvy long term investor.

Using a REIT allows you a stable, dividend producing investment that exposes you to the real estate market with very little downside. This does not mean that you can spend less time researching an REIT, than you would any other investment. In fact, a little rudimentary knowledge of the type of real estate your REIT invests in would go a long way in helping you make your choice. By having or seeking this, your decision into which REIT to invest in will be less emotional.

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