You need to select the right types of REITs — Real Estate Investment Trusts— to leverage more profits from your investment. Generally, REITs are classified into different categories depending on investment holdings and trading status.
Each REIT deals with specific real estate properties and offers varying opportunities for investors. Some of these sectors may bring in more profits, while in others, it may not be the same.
In this guide, we will dissect each REIT type in detail, and after reading this, you will be able to invest smartly.
What is Real Estate Investment Trust (REIT)?
Created in 1960 by Congress, a real estate investment trust enables you to invest in commercial real estate properties without actually buying and handling them.
These companies own real estate that generates revenue, and further, they share the dividends among the shareholders. Due to the high return on investment, many people invest in these companies. Besides generating revenue, these REITs offer a large number of jobs in the real estate sector.
Types of REITs
The major categories of REITs based on investment holdings are:
Equity REIT owns the real estate properties like apartments, warehouses, and office buildings. Like real owners, they handle every aspect of these assets. Maintenance, rent collection, and reinvestment in property—all these tasks are the responsibility of REITs.
The Mortgage REITs, also known as mREITs, don’t own the properties they invest in. Instead, they buy mortgage-backed securities and generate revenue from the interest on these investments. Even though the mREITs are risker, they offer higher dividends.
Hybrid REITs own the combination of equity and mortgage in their business portfolios. They own both real estate properties and mortgage-backed assets.
REITs are also categorized on the bases of trading status. These are as follows:
Publicly Traded REITs
These REITs are easy to access and are available on the exchange like stocks. Because of the liquidity of these stocks, you can buy and sell them much faster through your brokerage account. The publicly traded REITs are preferred over other REITs because of better transparency and standards.
It is important to note that Publicly traded REITs are required to register with the U.S. Securities and Exchange Commission (SEC) and provide audited financial reports.
Public non-traded REITs
Unlike their cousin, public non-traded REITs are not available on the stock exchange, so you can not trade them here. To purchase these non-traded REITs, you have to contact their financial advisors or go on online platforms—known as real estate crowdfunding platforms.
For obvious reasons, these RETIs have higher illiquidity— so you can’t buy or sell them easily. In fact, it can take up to eight years for them to become liquid again.
A lack of transparency is another problem with these REITs. In fact, most REIT companies won’t give you the estimated dividend upfront. The return on investment is not known for almost 18 months after investment.
DiversyFund and Realty Mogul, for example, offer investors the opportunity to purchase shares of publicly non-traded REITs online.
If you are investing for the first time in REITs, perhaps private REITs aren’t your cup of tea. These REITs are not listed, you can’t value and trade them easily, and SEC doesn’t register them. These REITs come with a lot of risks.
Factors to Consider When Selecting the REIT Type
Before investing in any REIT type, consider the following points:
- Choose the REIT that has higher liquidity— where you can buy and sell stock easily.
- The REITs that have a higher investment return and capital growth should be preferred.
- The management of a company is crucial to ensuring a return on investment. So select the REIT that has stronger management.
- It is all about quality. So, better choose those REITs with more valuable assets and great tenants.
- If you are not clear about your choices, you should buy mutual funds that invest in REITs— this way, all the necessary research and decisions will be made by them, and you will not have to worry about any of this.
The Bottom Line
REITs offer a great opportunity to invest in real estate and make passive income with minimum effort. There are many types of REITs— each with varying associated profits and risks. To get the maximum return on investment, you should choose REIT companies that have transparency, strong management, and higher liquidity.