Real Estate Investment Trusts: An Overview
An in-depth look at Real Estate Investment Trusts for new investors.
So you’re interested in Real Estate Investment Trusts (REITs)? Great! Then let’s talk about real estate investment trusts. Here’s why: If you’re planning on trying out real estate investing, your research is even more important as fears of a real estate market bubble swirl. Most real estate requires a huge upfront cost, the purchasing or financing of a property. And that can be a risky proposition, especially if you’re new to real estate investing. This is where REITs may be able to help.
Don’t get us wrong, there’s plenty of room to make money through real estate in 2018—including through property ownership. However, you may be looking for methods to invest that fall outside of popular investing strategies such as rentals or fix-and-flips. In this case, you may want to try Real Estate Investment Trusts.
Real estate investment trusts may be exactly what you’re looking for as your first time investing in real estate. Looking at a REIT vs rental property, real estate investment trusts are much more beginner-friendly, for a wealth of reasons. Today, we’re going to go over what real estate investment trusts are and how to invest in REITs, the REIT vs rental property basics, and a list of REITs to watch if you’re considering getting started. So let’s get going. What are real estate investment trusts?
What is a REIT?
Real Estate Investment Trusts are some of the most interesting real estate investing tools out there, because REITs make real estate investing a bit more familiar. Here’s a definition we’ll use as we learn how to invest in REITs:
A real estate investment trust is a company that primarily finances, owns, or operates income-producing real estate.
So, REITs are companies that make income through real estate. There’s a diverse list of REITs out there. For example, Equity REITs specialize in investing and owning properties. Meanwhile, Mortgage REITs invest in the mortgages that actually finance some of these properties. Some real estate investment trusts specialize in just one property type, such as single-family residential real estate. On the other hand, a list of REITs works across multiple properties.
Real estate investment trusts must adhere to extra regulatory guidelines, so not all companies that invest in real estate qualify as real estate investment trusts. This can be a little calming for investors who want to ensure that the inner workings of the companies they invest in are operating at a certain standard. In fact, since most REITs are traded on major exchanges (NASDAQ and NYSE), companies must meet even stricter guidelines!
How to Invest in REITs
For those wondering how to invest in REITs, let’s just say it’s a lot easier than buying a property. Real estate investment trusts were created in 1960 with the specific purpose of giving investors access to large-scale income-producing real estate. As you probably know, real estate can be a tricky nut to crack for new investors, because if you don’t have thousands or millions in cash on hand, you can be left out in the cold. REITs make for a great solution to this problem, so let’s go over how to invest in REITs.
Drumroll, please: REITs are traded like stocks. Remember how we mentioned real estate investment trusts were traded on major exchanges? Well, how to invest in REITs is identical to how to invest in stocks. You don’t need to find a real estate broker, landlord, or bank in order to invest in REITs. Most are available to you as long as you have a stock broker, trading platform, or app!
This not only answers the “how to invest in REITs” question for beginners, but gives first-time investors access to large real estate portfolios. If you have a background in trading stocks, you’ll have a sense of how to vet a real estate investment trust’s quarterly reports. Add to that your knowledge of the specific sectors your real estate investment trusts operate in. Once you’ve learned how to invest in REITs, you can start real estate investing with far lower buy-in.
REIT vs Rental Property
The REIT vs rental property comparison is fairly straightforward. Since REITs trade like stocks, they provide access to rental profits in a different investment vehicle. Still, REITs may not be right for you. To learn how to invest in REITs, you must compare a REIT vs rental property:
- Trades like a security – Real estate investment trusts trade like stocks and bonds, which are often more familiar to investors.
- Manages property – Real estate investment trusts handle all of the day-to-day operations of their company, including property management.
- Requires trading via broker or platform – To invest in real estate investment trusts, you’ll need a broker or a broker platform.
- Liquid asset – Should you want to take out the value you’ve invested in real estate investment trusts, you can get access to the cash fairly quickly by selling your shares in real estate investment trusts.
- Offers dividends – Real estate investment trusts are required to pay out dividends. If you’re smart about your investments, you can realize regular returns.
- Purchased directly – You must purchase a rental, which most likely means saving up for a downpayment and financing your purchase.
- Requires property management – You can serve as a landlord yourself or hire someone to do it for you. Either way, if you operate a rental, it will require typical property management.
- Requires purchase via broker or bank – Buying a property is a drawn out process, which usually includes a real estate agent. And unless you have the cash on hand, which is unlikely, you’ll need to secure mortgage financing to purchase your property.
- Illiquid asset – Should you need to take the value in your rental and convert it to cash, owning a property will be a slow-moving process. Selling a home can take weeks, months, or longer.
- Offers profit after expenses – With a rental, your return in the near-term is anything you have left over after you’ve paid your expenses, such as your mortgage, insurance, maintenance, and taxes.
In a REIT vs rental property analysis, real estate investment trusts carry some distinct advantages over a rental property: liquidity, flexibility, and low capital requirements. Real estate investment trusts are a great starting point for real estate investors. Now that we understand REIT vs rental property differences, let’s explore a brief list of REITs.
List of REITs to Watch in 2018
There’s a long list of REITs—over 150—listed on exchanges such as NYSE and NASDAQ. Many strong and fast-growing real estate investment trusts out there make a case for why you might want to consider them. Since you’re learning how to invest in REITs, we’ve compiled a brief list of REITs you might want to consider.
List of REITs:
- American Tower (AMT) – The telecommunications titan of real estate investment trusts on our list of REITs. AMT builds communications towers around the world, then rents space to companies.
- Simon Property Group (SPG) – SPG is one of the largest mall and outlet center real estate investment trusts, and the only one on our list of REITs. Some of the U.S.’s largest malls are owned by SPG.
- Public Storage (PSA) – PSA owns nearly 3,000 properties in Europe and the U.S., and it’s among the largest of the real estate investment trusts in the storage space.
- Equinix (EQIX) – As a real estate investment trust, Equinix owns and rents out data centers—providing all the basics like security and power to their facilities.
- Equity Residential (EQR) – EQR may be one of the smallest on our list of REITs, but it’s still huge. As homeownership proves cost-prohibitive to younger generations, real estate investment trusts like EQR have capitalized.
For many beginners, REITs provide a flexibility, liquidity, and potential for growth different than any other real estate investment. Now that you know how to invest in REITs, you may discover real estate investment trusts aren’t quite right for you. However, this list of REITs (and many others) is a great place to dip your toes in. So, do you think you’ll give real estate investment trusts a try?