REITs (Real Estate Investment Trusts) are the type of investment companies in which real estate properties are controlled, possessed, and managed in an effort to generate revenue for its shareholders. According to Al Hartman, REITs are a very solid, low risk investment opportunity. However, it is important that you understand there are different types of REITs and that each of them has a different proposition.
Types of REITs According to Al Hartman
- Equity REITs, in which the REIT purchases actual property and generates income through rent and eventual sale of the property.
- Mortgage REITs, in which the REIT borrows mortgages against properties. They also purchase mortgage-backed securities and mortgages. The revenue is generated through interest collections.
- Hybrid REITs, which effectively combine the equity REIT and the mortgage REIT.
Al Hartman explains that these three types show the difference in how revenue is generated. However, in Houston at least, a REIT may also have a further subdivision, focusing on a type of property. This is for those who have more faith in a certain industry, or maybe even who have seen a photo of a property that they want to invest in. Those types are:
- Retail REITs, which invest in retail properties. Usually, they are an equity model.
- Health care REITs, which purchase retirement homes, nursing homes, hospitals, and other health care centers. Usually, they also attract a third party manager whose role it is to maintain and operate the real estate property.
- Office REITs, which own office buildings, leasing out the space. Usually, these leases exist for longer periods of time, and that is also the understanding that investors will have of them.
How Does a REIT Work?
In order for something to be classed as a REIT, at least 75% of its full assets have to be invested in real estate. They must also have at least 100 investors. Furthermore, every year, 90% of the generated profits must be distributed across the investors. They can also never sell more than half of the stock they have to less than five different investors in the first six months of a tax year. Basically, they are an entity in which people can purchase pieces of real estate for a quick profit. This makes them a pass-through entity and one that cannot be taxed under income or federal tax laws.
How You Can Invest in a REIT
Anyone can invest in REITs and doesn’t have to physically own property. Rather, REITs offer share liquidity, which means it is easy to buy and sell them. They are, in a sense, a market for those interested in making investments. Finding them and buying into them is done in the same way as with stocks and bonds. Getting a financial professional or a broker to operate on your side is always a good idea, as they can also help you find the most suitable REIT for your needs.
Daryl Green