Being one of the best income-generating sectors globally, most investors want to invest in Real estate. However, most investors cannot invest in the sector due to high capital requirements. But investors focusing on real estate investing should worry no more as Real Estate Investment Trusts (REITs) have provided an opportunity for them to pool together their capital and earn dividends in every financial year.
Here is a post on what investors need to understand on Real Estate Investment Trusts (REITs).
What are Real Estate Investment Trusts (REITs)?
Investors need to understand that real estate investment trusts own, manage or finance income-generating real estate to make a profit. Like any other business, REITs provide opportunities for various investors to pool their funds together to invest in real estate and earn dividends.
How to qualify as a REIT
To qualify as a REIT, it should have a minimum of 100 shareholders who are entitled to 90% of the taxable income as dividends as agreed. In addition, 75% of the Assets contributed by the members must be used in real estate and managed by the board of directors or trustees.
Types of REITs
There are two main types of REITs where Investors can invest.
Equity REITs is a type of REIT in which most investors make their investments. Equity REITs are a type of investment in which real estate companies own and operate various income-generating properties and lease them to earn profits. In addition to leasing, the company makes a profit through property selling.
Mortgage REITs are a type of investment in which companies give mortgage loans and mortgage-backed securities intending to earn interest.
In publicly-traded REITs, trustees buy and hold properties on behalf of the investors. In addition, the trustee manages the properties according to the Trust Deed and the Offering Memorandum, and Investors get their shares at the end of the financial year as dividends.
Operate Single Real estate sector
REITs may specialize in one of the following real estate sectors
- Healthcare facilities
- Apartment complexes
- Self-storage and warehouses
- Office buildings
- Retail sectors
Operate Different Real estate sectors
However, Other REITs may diversify and invest in different real estate sectors.
Advantages of Investing in REITs
Unlike other Direct property investments, in REIT investments, shareholders can quickly convert their shares into cash. Conversion is possible through selling units in the market or redeeming them for money.
Investing in REITs will enable shareholders to invest in different hotels, apartments, health facilities, and infrastructure.
Most REITs are traded publicly and make them sufficiently transparent. After every financial year, the trustee discloses the financial information to investors. Thus, members will predict the future and make the right decision.
- Capital Access & and Access to investments
REITs provide an opportunity to the middle-income class to mobilize their savings and invest in a capital-intensive real estate project. In addition, the loss will be distributed among the investors in case of a loss.
- Stable cash flow through dividends
Because of the long-term lease agreement with tenants, income is predictable. So, before investing in REITs, investors will already know the amount of income.
Disadvantages of Investing in REITs
- Weak Growth
The law requires that 90% of the income in publicly-traded REITs be used to pay the investors in dividends. Only 10% is left in the company for growth and development.
- No Control Over Returns or Performance
Unlike indirect real estate investment, where investors can control cash flow and implement various management practices, for REITs, management is done by the trustee. Members can only sell their shares if they don't like the performance.
- Dividends are taxed as regular income
Although income on investment is less taxed, dividends are taxed as regular income. Taxing will leave shareholders with a higher tax bill than it could be when taxed under the investment income.
You can now tell what REITs are, how they qualify to be REITs, types, and how they operate through the above content. Additionally, the post has highlighted the pros and cons of investing in REITs, thus helping potential investors make the right decision.