For many, the real estate sector is the gold standard of all investments. It has a long-term track record. It can provide a stable income and is an investment that is tangible and usable. When looking at your building, you can feel more comfortable and satisfied.
There is a way to invest in real estate without owning individual properties. It is known as a Real Estate Investment Trust (REIT).
What is a Real Estate Investment Trust (REIT)?
There is a REIT to invest in income generating properties. It will be done directly through the purchase of the real estate, or indirectly through the granting of loans or the purchase of pre-existing mortgage agreements. To qualify as a REIT at least 90% of your profits must be disbursed to shareholders as dividends.
REITs are generally divided into three categories are as follows.
REITs of Equity
The well-known type of REIT is Equity REIT focuses on acquiring, managing and developing investment properties. Since REIT restrictions require that properties be maintained and developed over a long period, their primary source of income is rental income from their properties. In general, they invest in specific types of property, which are generally classified into the following categories:
- Office and Industrial
- Hotel and Resort
- Health care
- Raw land
Not as popular as capital REITs, these funds lend money to real estate investors or invest in existing mortgage loans on properties (instead of investing directly in the properties themselves). Their main source of income is interest on the loans they hold.
A combination of REIT capital and mortgages, Hybrid REITs diversify between owning properties and making loans to real estate investors. Their income comes from both income and interest.
Advantages and Disadvantages of REIT
There are advantages for REITs that must be weighed before investing:
- Investors can diversify within the real estate market by having an interest in multiple properties with minimum money.
- The risk is grouped among many investors against a single owner.
- REITs pay high dividends in cash.
- Many REITs offer high liquidity, with direct real estate, by allowing investors to sell shares quickly.
- Investors share ownership of large properties, such as office buildings or hotels that would otherwise be difficult to pay.
- The properties are professionally managed.
- REITs generally show low growth as they must return 90% of the income to investors. Therefore, only 10% of the income can be reinvested in the business.
- REIT dividends are not treated according to the 15% rule that benefits taxes and falls under most dividends. They are taxed as regular income at a much higher rate.
- The investment risk can be significant. Do your due diligence before investing and take into account all the factors of the real estate market include property values, interest rates, debt, geography and changing tax laws.
- REIT investors give up control of all operational decisions that an individual owner would make.
- Some REITs will incur high administration and transaction fees, which will generate lower payments for shareholders.
It has seen significant growth in many markets. There are excellent long-term investment opportunities in the real estate sector. REIT in the real estate market is an attractive investment that generates income in an environment with low-interest rates.
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By: Shailaja K
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