Real estate offers investors of all levels many opportunities to turn a profit. Some investors may shy away from real estate ventures not wishing to deal with rental properties, tenants, or the responsibilities that come with being a landlord. If this is you and you're still interested in owning some level of real estate, there's another option — REITs. Real Estate Investment Trusts (REITs) are a type of real estate investment that allow you to buy shares of a corporation that owns a property and then earn money through dividends paid out.
Real Estate Investment Trusts (REITs) Basics
REITs are not a new investment opportunity. In 1960, the U.S. Congress established legislation for REITs as a way to enable the general investor (someone not affiliated with a corporation) to be part of upper scale, commercial real estate projects. It's a popular alternative to purchasing an investment property and personally shouldering all of the risk that comes with that endeavor. The National Association of Real Estate Investment Trusts (NAREITs) defines REITs as, “companies that own and most often actively manage income-producing commercial real estate.” In addition, NAREIT states, “Some REITs make or invest in loans and other obligations that are secured by real estate collateral.”
On average, investors can find the shares of many larger REITs publicly traded on any major stock exchange. REITs have been included in the Standard & Poor's Indexes (S & P) since 2001. There also are private REITs that are not traded on the public exchanges.
How REITs Work and Types Available
REITs must have at least 75-percent of their gross income from real estate related sources plus invest at least 75-percent of their total assets into real estate, reports Fundrise. “In addition, REITS must distribute no less than 90% of their taxable income every year to their shareholders by paying dividends.”
Individual investors are required to pay income taxes on any dividends received from their REITs. Types available are diverse, including but not limited to:
- Shopping complexes and regional or outlet malls
- Industrial commerce parks
- Office buildings/properties
- Hotels and resorts
- Health care facilities
- Apartment complexes
Benefits of REITs
One of the top benefits of REITs is investors typically can find one to sync with their industry of choice. For example, you may have always desired to own your own hotel. With the right REITs, it's possible to investment and become a shareholder in an upscale corporation that owns this type of commercial property.
The top benefits for investing in REITs include:
- Allows investors to earn income from real estate without having to own the property
- Provides dividend income
- Has the potential for long-term capital gains, ideal for beginning and intermediate investors
- Helps with portfolio diversification
According to the NAREIT, “Dividend growth rates for REIT shares have outpaced inflation over the last decade.”
Diversifying the Portfolio
As with any investment, there always is a level of risk. In general, mortgage REITs, also known as mREITs may present more volatile risks than regular REITs. Of course, any time you invest in a stock option, there's the potential of it decreasing in value. When considering REITs as a way to diversify your portfolio or to begin building your dividend income, it's essential to do your research. Work with a trusted investment professional, one that has experience and the know-how to direct you to the best REITs for your purposes.
If you're ready to become involved with real estate as an investment but don't wish to become a property owner or landlord, the REITs may be an ideal opportunity.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.