Real estate investment trust (REITs) is a key consideration when building any equity or fixed-income portfolio. They provide potentially higher total returns, lower overall risk, and greater diversification. In short, their ability to generate dividend income, coupled with capital appreciation, makes them a good balance of stocks, cash, and bonds. Keep reading to learn things you need to know about Real Estate Investment Trust.
Different types of Real Estate Investment Trust
Depending on the type of real estate holdings, the different types of REITs available around the world are:
Residential: A real estate investment fund that owns and manages completed homes and rental condos.
Retail: These real estate investment funds require at least 24% of their assets to be invested in retail businesses such as malls and independent retail stores.
Healthcare: These trust funds primarily invest and manage healthcare-focused real estates such as hospitals, retirement homes, nursing homes, and medical centers.
Mortgage: For these real estate mutual funds, it is estimated that 10% of the investment is spent on mortgages rather than real estate.
Office: These real estate investment trust funds primarily invest and manage offices. Therefore, the primary source of income for this type of real estate investment fund is the rent obtained from tenants with long-term lease rights.
How to invest?
When real estate investment trusts are listed on major stock exchanges, investors can buy stocks quickly as other public stocks. Most real estate investment trusts listed on public stocks are REITs.
Investors can also invest in mutual fund REITs or exchange-traded funds (REITs ETF). That allows investors to buy a range of stocks in the entire REIT index. You can also buy private real estate investment trusts and non-trading public REITs. However, it is more complicated. Such investments are usually limited to institutions and individuals that meet specific financial standards.
Its long-term returns are similar to those of the S&P 500 Index and high-value US stocks, but REITs appear to be optimized to diversify their investment portfolio. From 1975 to 2006, a portfolio divided 50/50 between the S&P 500 and a REIT index returned 15.2%, vs. 13.5% for the S&P 500 alone. The icing on the cake: the risk is 12% lower than the S&P 500 itself.
How REITs make money?
Generally, real estate investment trust funds follow a simple business model. The company purchases or develops real estate whose primary source of income is rent. The income produced by the company is paid to shareholders in the form of dividends. Real estate investment trusts can also make money by buying and selling real estate.
However, some real estate investment trusts do not own real estate but choose to raise funds for real estate transactions. These REITs generate interest income by raising funds. Mortgage real estate investment trusts are one of the REITs that do not own real estate.
Real Estate Investment Trust Investment brings multiple benefits to investors. They offer the benefits of real estate investing, but with the convenience and simplicity of investing in publicly traded stocks. As mentioned above, REITs have nothing to do with other stocks or bonds, so they also provide diversified investments. They also offer higher risk-adjusted returns and effectively reduce the overall volatility of the investment portfolio.
Real estate investment trusts also offer investors consistent and reliable dividend payment benefits. In addition, their long-term performance is outstanding as the total return of REITs has outperformed the S&P 500 index over the past 25 years. Finally, real estate mutual funds are highly liquid, which usually excludes the risk of illiquidity associated with real estate investing.
Based on mutual funds, Real estate investment trust has always provided a normal source of income, long-term capital valuation, and diversified investment for all types of investors. Investors can buy stock in equity and mortgage stocks. Equity REITs own real estate in various real estate sectors, including office, retail, and residential.