In this article, we learn what is REIT and what different types of REITs are available across different industries.
What is REIT?
Real Estate Investment Trusts (REITs) are companies that allow investors to invest in commercial or residential real estate to generate income. Similar to mutual funds, when you invest in REITs, you can combine your capital with several investors so that all will be able to get the dividends. REITs are easy to buy and sell as they are traded publicly on the secondary market. They offer greater diversification for your portfolio and higher returns with lower risk.
What are different types of REITs?
Usually, there are two major categories of REITs: Equity REITs and Mortgage REITs. Most of the equity and mortgage REITs are traded on the national stock exchanges.
Mortgage REITs earn their profits through the interest income generated from investing in residential and commercial mortgages.
Equity REITs generate profits through dividend income received by ownership of long-term properties. Equity REITs are available across various industries like retail, healthcare, hospitality, and others.
Retail REITs are companies that acquire retail locations like malls, shopping centers, and freestanding properties. About 24% of REIT investments belong to this category. When you start thinking about retail REIT investments, you need to check both REIT itself and its retail industries. Firstly, keep in mind that REITs generate your income from the rent which is charged from tenants. If retailers are facing poor sales, there can be different problems that affect your portfolio income. Secondly, you need to check if REIT has good profits, little debt, and strong balance sheets. It is essential because REITs only with significant cash positions can buy good real estate at reasonable prices.
These kinds of companies own multi-family homes, apartments, and manufactured housing. Residential REITs are attractive investments as you can benefit from economic growth and population growth. Thus, more people will be in search of rent.
High prices of owning houses make people rent and pay higher fees. Moreover, it would be best if you considered several important factors before investing in residential REITs. You must invest in REITs with houses where home affordability is low compared to the rest of the country. For instance: large urban areas can be good options to choose from.
Healthcare REITs are another attractive investment option since healthcare costs are increasing. They invest in hospitals, nursing homes, and assisted living facilities. Are all examples of healthcare REITs. It is excellent and safe to have a diversified group of investments in different property types.
Office REITs invest in office locations. They receive rental income from office tenants and benefit from longer leases compared with tenants of industrial properties. However, since more and more people start to work from home during the pandemic, companies are rethinking how they manage their offices. So, it is always better to invest in economic strongholds.
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