Although there is a wide variety of investments you can choose to sink your funds into these days, one that has always been a solid choice over the years is real estate. However, if you’re a new investor or just haven’t got into the area of property at all in the past, it can be a little daunting knowing where to start with this asset type.
After all, it’s not only about choosing the perfect property, but also about negotiating the price, getting a loan, renting it out to good tenants, potentially renovating, and eventually selling it at the highest possible price. Another factor that can be intimidating, or down right exclusionary for many people, is the cost of real estate investments. You need to have a whole lot of cash available to put into a property, even if you do get a loan to pay for a large proportion of it.
This is where considering a real estate investment trust (REIT) comes in. While they’re not talked about as much as traditional real estate investing, REITs can be the perfect choice for new and experienced investors alike, whether you’re limited in funds, knowledge, or time, or just want to try an alternative investment structure. To work out whether this option might be good for you, read on for the lowdown ahead.
So, What Exactly Are REITs?
Real estate investment trusts are organizations which sink their money into buying (as well as sometimes managing) real estate which produces an income. They have similarities with ETFs and mutual funds, but instead of investing in shares, they buy properties and/or mortgages, and use these assets to bring in income. REITS can choose to manage either the properties themselves or the mortgages on them to make a profit. They very rarely develop and resell investments; their aim is to buy and hold properties as part of a portfolio.
A real estate investment option such as this type of trust allows investors to have a stake in many different types of properties. In particular, though, REITs typically invest in commercial real estate like apartments, office buildings, hotels, and malls.
To be qualified as a real estate investment trust, organizations must invest at least 75 percent of their assets into property. In addition, REITS legally have to have at least 100 shareholders, plus no five of these shareholders are allowed to own more than 50 percent of shares between them.
A Brief History of REITs
Although they don’t get talked about anywhere near as much as share-market trading and many other forms of investment, REITs have actually been around for over 50 years. In 1960, Congress granted legal authority to form REITS, as an amendment to the Cigar Excise Tax Extension of that same year. The REIT Act title was then signed into law by President Eisenhower.
Within a year, the very first real estate investment trusts were created. Bradley Real Estate Investors, First Mortgage Investors, Continental Mortgage Investors, Washington REIT, First Union Real Estate (now Winthrop Realty Trust), and Pennsylvania REIT were the pioneers, and some of the trusts are still trading now on the New York Stock Exchange (NYSE). Over the years, REITs have multiplied quickly, and there are around 200 of them listed on the NYSE today.
Some Reasons to Choose an REIT
There are numerous reasons to consider investing your savings into a real estate investment trust. For starters, they have enjoyed top returns over recent decades, and can provide a nice, steady stream of income. While certainly they are some limitations and risks to think about, just as there are with any other investment types, REITs can provide investors with greater diversification, higher returns and lower risk than lots of other asset types.
In addition, putting money into an REIT means you get to have real estate in your investment portfolio even if you don’t have hundreds of thousands of dollars to invest, or the ability to get a loan for such a large amount. Similarly, by choosing an REIT, you can have your money invested in large-scale commercial real estate, which most individual investors can never do; and you can enjoy the benefits of owning this type of property without having to worry about maintenance or tenant issues, or aspects such as spending time researching, inspecting, and comparing properties, or negotiating when buying or selling them.
You can also potentially save money on taxes when you choose to invest in a real estate investment trust. For example, since REITs must maintain dividend payout ratios of a minimum of 90 percent of annual taxable net income (excluding capital gains), and these dividends are taxed as ordinary income rather than as corporate income, your tax payments can be reduced.