REITs companies are businesses that have investments in the real estate industry and generate an income out of it. Numerous people invest in REITs since they are modelled after mutual funds, which are one of the most reliable investment options. Through REITs, investors earn income in the form of dividends without having to actually manage any of the properties they have invested in.
There are three main types of REIT investment companies. They are:
- Mortgage REITs: Real estate owners borrow money from mortgage REITs through loans or through mortgage-backed securities. Their revenues are essentially determined by the net interest margin, which is the difference between the income they make on mortgage loans and the cost of these loans receiving funding. Because of this paradigm, they may be susceptible to interest rate hikes.
- Equity REITs: The majority of REITs on the market are equity REITs that generate incomes through rents, by owning and managing real estate.
- Hybrid REITs: Hybrid REITs consist of a blend of strategies used in both mortgage and equity REITs.
Categories of REITs
1. Retail REITs
Shopping malls and shops account for around 24% of REIT investments. This is the largest investment of its kind in the USA. When the economy is bad, retail REITs with a lot of cash will be able to acquire real estate at bargain rates. However, this sector is under pressure since the majority of the businesses are shifting to the online shopping model.
2. Residential REITs
These REITs consist of rental apartment buildings and manufactured housing. The higher the demand, the better residential REITs perform.
3. Healthcare REITs
This sub-sector invests in hospitals, nursing facilities, retirement homes, etc. The success of healthcare REITs entirely depends on the healthcare system. This is because the majority of the REIT operators depend on the occupancy fees for income. So far, this is one of the best REIT companies to invest in.
4. Office REITs
REITs that invest in office buildings are known as office REITs. Tenants who have typically signed long-term leases provide them with rental money. Before investing in an office REIT, questions regarding the state of the economy, vacancy rates, amount of capital needed, etc., must be evaluated.
Advantages of Investing in REITs
REITs offer their investors a lot of advantages. One of the biggest advantages of investing in REITs is the high yield dividends the investors receive. As per the law, REITs must pay their shareholders a minimum of 90% of the taxable income. It goes without saying that the dividends in REITs are usually higher than what one would receive when they invest in mutual funds and the stock market.
REITs have a very straightforward track: Real estate is leased out and rent is collected on the same. The income which the company collects is shared with the shareholders as dividends. REITs, just like other companies, give a detailed report on their financial results by declaring income per share as defined by generally accepted accounting principles (GAAP).
One of the other benefits of REITs is portfolio diversification. REITs offer the general public a chance to purchase real estate and earn a passive income off it. This is usually not possible in a lot of places for a variety of reasons. What’s more, since it takes a while to buy and sell real estate which ties up the cash flow, REITs remain unaffected. They still remain very liquid. This means, with just a few clicks they can be bought and sold.
Frequently Asked Questions (FAQs)
1. How can a company qualify as a REIT?
There are various provisions under the Internal Revenue Code which a company must adhere to should they wish to qualify as a REIT. As a REIT, they must own income-generating real estate for a longer period of time and distribute 90% of the income to their investors.
2. Who can invest in REITs?
Anyone can. Individual investors of all ages can invest in REITs. Other investors include pension funds, family offices, etc.
3. Are there any investment benefits to REITs?
Absolutely. REITs provide a total return on investments. Not only do they divide 90% of the income among shareholders, but there is also potential for capital appreciation. REITs offer liquidity and portfolio diversification too.