Do you want to own a portfolio of real estate to collect rental cash flows? Have someone with expertise manage the real estate and also see your real estate keep up with inflation?
No, we are not talking about buying property upfront to generate these cash flows. There is an alternative solution…
What is REIT
When it come to real estate investment, it is no longer about just buying and selling properties. It is now becoming more sophisticated with the introduction of REIT. Since 2010, REIT is becoming very popular. Think of REITs as like a combination of stocks and property.
REIT stands for Real Estate Investment Trust. When you invest in REIT, your money is pool together with other investors in a collective investment scheme. This scheme invest in a portfolio of income generating real estate assets such as offices, shopping malls, hotels or serviced apartment.
You can invest in REIT the same way you will invest in stocks through your broker. You shall know that these assets are manage professionally with revenues being generate from assets that are normally distribute at regular intervals to REIT holders. It is after accounting for fees such as REIT management fees and property management fees.
Anyone can trade REIT on major exchanges, publicly registered or private.
The Total Return is make up of 1. Dividend Yield and 2. Capital Growth
The types of REIT
There are two types of REIT: equity REIT and mortgage REIT
Equity REITs are basically real estate companies who purchase commercial properties and let them out in order to generate income. They acquire, manage, build, renovate and sell income-producing real estate. It is very popular among investors. This type of REIT are suitable for investors who want commercial ram estate action without the need to go out and buy property. They generate rental income by properties they operate.
Mortgage REIT is investing in mortgages, mortgage backed securities and related assets instead of physical properties. Mortgage REITs gain profit by selling mortgages and earning income from the interest on the mortgages they own.
If we are to compare Equity REIT and Mortgage REIT, the former is much more common. Equity REIT account for roughly 90% of the REIT market. Both equity REITs and mortgage REITs may be listed on major stock exchanges. They can also be traded privately.
Main reason to buy REIT
There are so many types of investment options out there. So why we must consider REIT?
Invest in property with small capital
If you have limited capital and you like the idea of investing in properties, REIT is for you. These days, you can buy REIT at below $100. In typical property investment, you need to think of downpayment. REIT investment is liquid compare to traditional property investment. You can come out of it at any time.
You can invest without having to ask permission to anyone. There is no need to get a loan at the bank to invest in a REIT.
Easily diversify your portfolio
As REIT is quite cheap to invest, you can easily diversify portfolio. It is good to balance your portfolio across different regions. You are not limited to residential investments or small investments when you are investing through REITs. The gap to understand REIT is smaller compare to other general market investing.
If you are starting out in the field of property investment, you aren’t going to buy a 10 apartments building as your first investment. As normally you don’t have the capital, you will usually focus on smaller investments like condos or small houses.
Your investment is hands off
It is a “clean” investment compare to traditional property investment. No need to fix toilet or other facilities like a normal property. Everything is left for the REIT company to handle. It is a hands off approach to this type of real estate investment.
The only thing you have to do is to select the right REITs for your portfolio, receive your dividends, and reinvest your earnings if you want to. It is easier and hassle free.
It provide great returns
You can achieve great returns in REIT. Many people can get yield of around 5% annually. It is only slightly smaller than traditional property investment. This is definitely worth considering as REITs is a small price to pay compared to all the hassle that comes with owning and managing your own property.
You can get your dividends from REIT as fast as quarterly per year. It may not be like traditional property investment which can get yield every month but it does not fare too badly.
The risk for Equity REIT and Mortgage REIT
As like other forms of investment, REIT has it’s own risk as well. We shall take a look on possible risk if you buy these REITs:
- Equity REITs more incline to be cyclical in nature and can be sensitive to recessions and periods of economic decline.
- On equity REITs, if there is too much supply- Example, more hotel rooms than a market can support, it can lead to higher vacancies and lower rental income.
- The changes in interest rates can impact earnings for mortgage REITs. Similarly, lower interest rates may lead more borrowers to refinance or repay their mortgages and the REIT has to reinvest at a lower rate disappointingly.
- Most of mortgage securities that REITs buy are backed by the federal government, which limits the credit risk. However, certain mREITs can be exposed to higher credit risk. It all depends on the specific investments.
How we qualify REITs
REITs need to comply with certain Internal Revenue Code (IRC) provisions. So for a company to qualify as a REIT:
- Invest in at least 75% of total assets in cash, real estate or U.S. Treasuries
- Must earn at least 75% of gross income from rents and interest on mortgages that finance real property or in real estate sales
- Minimum of 90% of taxable income payment in the form of shareholder dividends per year
- Become an entity that is taxable as a corporation
- Minimum 100 shareholders after the first year of existence
- Must be managed by a board of directors or trustees
- Must not have no more than 50% of its shares held by five or fewer individuals
A corporate can avoid corporate income tax by having REIT status. A REIT will distribute all or almost all of its profits and gets to skip the taxation
How to start on REIT
So you know a little background on REIT, how you start on REIT now?
There are some guidelines that can save you the time to start it (though not limited to these):
- Know the Code/Symbol of the REIT
- What is the current price and historical price
- The historical dividend per unit per year
- Start calculate the annual dividend yield
- Some resources that you can view dividend yield at a glance
- Official Company Reports – Quarterly FS and Annual Reports (including the older ones), Rights issues, placements, general announcements
- Third Party Reports – brokerage reports
REIT is easier to understand for beginner investors. Equity and mortgage REITs are required to pay out 90% of income to shareholders in the form of dividend. The good thing is, they are often higher than those of stocks.
Equity REITs may be attractive to buy-and-hold investors looking for a combination of growth and income. On the other hand, Mortgage REITs may be better suited for risk-tolerant investors looking for maximum income without much focus on capital appreciation. Whether it is worth to buy REIT depends on your level of risk you can take and your understanding of real estate fundamentals.
Equity REITs hold large amount of Real Estate. Large Real Estate Holdings make eREITs especially resilient to bankruptcies.If you have high-yield portfolio, REITs are an obvious source of high, recurring and stable dividends.
Base on Google Trends, google search interest on REIT in the United States reach all time high in 2019:
Interest in REIT is climbing vigorously in 2019 and peaked in March 2020 before losing steam. It is in downward trend for interest after March 2020.
Similarly, i take a look at the chart for some REIT companies:
It is climbing fast since beginning of 2019 before fizzle out around end of the year. This explain the interest surge in REIT soon after 2019. But is it too late to buy REIT now?
It is still not too late as REIT is not too saturated yet. You can still invest in it with research and due diligence.
Get to know how to find value in REITs in here
To find out more on other investment types, go here