Have you ever found yourself driving down the street and looking at different types of income producing properties while thinking to yourself, “I really wish I could own a piece of that shopping center, hospital, or apartment complex!” For most potential investors who do not possess significant capital or access to a lot of cash, it would be challenging to acquire an investment property in a prime location. Additionally, if an investor purchased one significant property with all their savings, like a shopping center or apartment complex, there could be increased risk to the investor due to lack of diversification. Fortunately, for the past 50 years there have been companies that allow investors to own a piece of commercial real estate without the typical obstacles of requiring a large down payment, commercial financing, or asset risk. This type of company is called a Real Estate Investment Trust or a REIT.
Origin of REITs
Real estate investment was historically reserved for affluent people or groups of investors focused on pooling their capital. In 1960, real estate investment trusts were created and modeled after mutual funds. Congress created REITs with the intention of allowing Americans the opportunity to invest in income-producing properties the same way other people earn a return through stocks and bonds using mutual funds. Income properties are generally known as apartments, offices, or shopping centers that offer positive cash flow through the collection of rents that are higher than costs associated with maintenance and financing. REITs paved the way for every investor to own a stock in a large portfolio of commercial real estate without the challenges of buying as an individual.
1. Income and Long-term Growth: When combined with stocks and bonds, REITs can provide long-term rates of return.
2. High Dividend Yield: Throughout the economy’s up’s and down’s REITs typically provided a higher dividend yield than other types of equities.
3. Liquidity: Unlike a real property like a single-family residence, four-plex, or strip mall; REITs can be quickly converted back into cash by selling shares on the market.
4. Professional management: experienced executives normally manage REITs with a significant background in real estate investment and development. Most publicly traded REITs are also governed by a board of directors that help guide the firm’s decision making.
5. Oversight: Just like stocks, bonds, and mutual funds REITs receive oversight by a team of professionals. This oversight helps keep investors protected by rights dictated by government and industry regulators.
6. Disclosure obligations: REITs that are registered with the SEC are mandated to provide timely reporting to investors. This level of transparency is important for investors, funds, and traders.
The Future of REITs
Real Estate Investment Trusts will continue to be a viable option for people who are saving for retirement, investing for a rate of return, and those looking for a way to tap into the global real estate market. REITs can be found in 25 countries, 225,000 401(k) plans, and over 300 mutual funds. Investing in commercial real estate such as hospitals, shopping malls, apartment complexes, and other categories of real estate is within reach for all types of investors. After consulting a licensed professional and considering inherent risks, investing in REITs could be the right option for you.
RO MERCADO is an MBA student and regularly comments on macroeconomic factors that affect commercial real estate. He leads a marketing, design, and research company that
caters to commercial real estate firms.