A Beginner's Guide to Investing in Real Estate Investment Trusts (REITs)

Many people realize that you need to have the money for buying real estate to start investing. Regardless of its purpose — dwelling, commerce, offices, industry — you can make a profit two ways:

1. Buy real estate and resell it with a profit.
2. Lend your real estate and receive income.

Both options require large sums for buying the object you are interested in. Also, if the investor decides to buy real estate abroad, things become even more complicated.

Nowadays, there are less expensive ways of investing in foreign real estate. I will now speak about REIT — Real Estate Investment Trusts. Such trusts construct or buy real estate and then, lending the houses, share the profit with the investors.

REITs are common in the USA, Canada, Europe, and Asia.

Types of REITs

There are several types of investment trusts:

• REITs invest in physically existing real estate: houses, other buildings, medical, office, or industrial real estate;
• mREITs invest in mortgage deeds. As a rule, such trusts own no physical real estate or its share in the general portfolio is minimal.
• Mixed trusts invest in both.

Also, real estate that funds invest in can be split into categories according to its purpose:

• Commercial buildings and sales areas;
• Industrial projects;
• Housing stock;
• Medical projects;
• Agricultural projects.

Conditions for registering a REIT

To become a REIT, a company must comply with the following rules, the execution of which is constantly under control.

Conditions:

• 75% of the assets must be invested in real estate;
• Minimum 75% of profit must be generated by lending, trading real estate, or mortgaging;
• No less than 90% of profit must be paid to investors as dividends. This obligation is written down in the regulations of REITs and the corporate charter. Such generosity provides the company with tax relief. The remaining 10% are used for development and buying new projects. There are cases when trusts pay 100% of their profit as dividends to avoid paying back corporate debts;
• The company must be managed by a board of directors;
• There must be no less than 100 investors; 5 or less out of them must not hold more than 50% of stocks.

Advantages of a REIT

• High liquidity, compared to real estate. Stocks can be bought and sold at any moment, which is almost impossible for buildings;
• No expenses on maintaining and fixing buildings, no search for tenants – all his is done by the employees of your trust;
• A relatively low investment threshold: anyone can buy a stock of the trust, owning a rather small sum. The stock price of REITs differs, so you can choose a suitable one according to your capabilities;
• Regular dividend payments. Most REITs pay dividends once in a quarter, but some do it monthly;
• Investments in REITs help diversify your portfolio not only by the purpose of real estate but also by countries. Most trusts have real estate in different states, which helps to minimize risks of some force majeure events or seasonal losses;
• A low correlation with the stock market. The falling of this market does not influence the stocks of REITs. In certain cases, REITs grow ahead of other sectors;
• A protection from inflation. In most cases, profitability from REITs is higher than inflation, which helps the investor not only save but also increase their capital.

During the last ten years, REITs have been demonstrating the highest dividend yield than any other type of company.

Drawbacks of a REIT

Alongside positive sides, REITs also have drawbacks, which would be:

• An increased tax rate. In the USA, an investor will pay 30% of their dividend yield as taxes;
• High volatility of stocks. The stocks of trusts are traded in the exchange, move constantly, and are often used for speculative purposes. This is what is to be accounted for when investing for medium and long terms;
• A decrease in the rent in crises may harm dividend payments seriously;
• Unemployment can harm mortgaging noticeably, causing trusts to lose their profit;
• Misuse of loaned money. Apart from investments, the company develops using lots of loans that may turn into an unbearable load with time. Also, all REITs use credits and mortgages for buying and constructing real estate;
• Extremely high dependence on interest rates that can also decrease the profit of a trust tangibly.

How to invest in REITs?

To put it simply, a REIT is a joint-stock management company, in which shareholders have the right for receiving dividends. This means that anyone can buy as many stocks as they need and become a shareholder.

All REITs are interested in attracting more money for further development. The capitalization of the largest trusts is over a billion USD. And the larger the capitalization, the stabler the company is in crises and turbulence.

How to choose a REIT?

Choosing a trust to invest in, study the business of the company and its performance. You can do it one of the following ways:

• Study the structure of assets on the balance of the trust;
• Study quarterly reports;
• Study the debt: if it is large, it may later harm the profit of the trust;
• Study the dividend yield for previous periods.

Closing thoughts

Stocks of REITs are traded in the exchange alongside any other stocks. They are another way to invest your funds, save it, and get dividends. Real estate in some cases can be a less risky investment than industrial companies, but also entails certain risks that you must account for. For a REIT, not only the capitalization and dividends are important but also real estate in different countries, which helps diversify risks.