Real Estate Investment Trust (REIT) is a non-traditional approach in investing in real estate involving companies or groups of companies that engage in financing, property management, as well as commercial or residential investments. They are structured much like mutual funds so that it presents investors with assets diversification, long-term capital appreciation, and other types of regular income avenues. REITs are being traded on primary stock exchanges that provide a pool of benefits to many investors. The trade of REITs help enliven many communities to develop and thrive further.
REIT enables anyone to invest in real estate portfolios. Investors receive a percentage from the income generated from their real estate investments without having to do the hard work of buying, managing, or financing a property. About 87 million Americans invest in REIT stocks through investment funds like 401k.
What Assets are Under the Ownership of REITs?
In the United States, all the different types of REITs put together has a total of over USD3 trillion in gross assets and roughly USD2 trillion worth of assets listed in the stock exchange. These figures represent an estimate of more than 500,000 properties. In the U.S. equity market, REITs have a listed capitalization of over USD1 trillion dollars.
Their portfolio includes an extensive range of real estate property types which includes apartment buildings, cell towers, data centers, hotels, infrastructure, medical facilities, offices, retail centers, and warehouses. Many REITS manage multiple property types in their portfolios but there are some who focus only on specific property types.
How do REITs Earn Money?
The majority of REITs run on a straightforward and simple business model that is very easy to understand. REITs earn income by renting out space and selling assets. The earned income is paid to investors in the form of dividends that are disbursed every quarter of the year.
Unlike common stocks, REITs are mandated by law to allocate 90% of its earnings to their investors each year. However, these disbursed dividends are treated as ordinary income and therefore taxed as ordinary income. Thus, the higher dividends and investor receives, the higher the taxes depending on its bracket.
Important note: Mortgage REITs or mREITs do not directly own a real estate but they finance real estate and gain earnings from the interest it accumulates.
REITs Past Performances
For the past 45 years, REITs have had a proven track record of its reliability and growing dividends. U.S. equity REITs has outdone U.S. stocks with long periods of investment (stocks, bonds, and other assets). These past handsome performances have made REITs an attractive investment opportunity for many investors looking for better passive income.
REITs listed on stock exchanges are managed professionally with the sole target of maximising investor's share value. This means strategically positioning their real estate assets to draw in tenants and generate rental income. They are also effectively managing property portfolios by buying and selling of property in order to build value through longer real estate periods.
This pushes overall return performance for investors of REIT, who gain from a solid, dependable annual dividend payment and the possible long-term capital increase. For instance, the total return performance of REITs in the last 20 years has outpaced the overall performance of several key indices including the S&P 500 Index.
Why Should You Invest in REITs?
Historically, real estate investment trusts have achieved competitive total returns influenced by high and strong dividend income and long-term capital valuations. Their relatively low correlation with some other assets is likewise an outstanding approach to diversify portfolio, to minimize general portfolio risk, and to boost returns. These are the main features of REIT-based investments which makes it a better investment option for many investors.
Investing in REITs is inexpensive and easy. With REITs, one can earn passive income without all the hard work of buying or managing properties. It is the easiest approach to get involved in real estate investing.
The Different Types of REITs
There are four types of REITs - the Equity, Mortgage (mREITs), Public Non-listed, and Private. Let's differentiate one from the other.
i) Equity REITs. Most Equity REITs are traded publicly on key stock exchanges and are the direct owner and operator of their income-generating assets.
ii) Mortgage REITs (mREITs). Mortgage REITs are more similar to financing companies. They underwrite mortgages for properties and earn an income from interest on mortgage payments.
iii) Public Non-listed REITs (PNLRs). These types of REITs are duly registered with the SEC as REITs. This obligates them to make regular reports; however, they are not listed on major exchanges.
iv) Private REITs. These are REITs that are privately held and are not traded on exchanges. Offerings under Private REITs are not impacted by or exempted from SEC registration.
How to Invest in REITs?
Just like any public stock, anyone can purchase shares in REITs through a broker. Aspiring investors can also buy shares through an exchange-traded fund (ETF). An ETF is a collection of securities on a set of equities that trade on stock exchanges.
Investing through a broker, an investment advisor, or a financial planner makes investing a better experience. They can look through the investor's objectives and suggest the right REIT investment.
How are Companies Being Qualified as REIT?
For a company to qualify as REIT, they must comply with the following as stated below:
- The company should invest 75% (minimum) of its overall assets in real estate
- The company should be getting at least 75% of its gross earnings from property rentals, mortgages financing interests, or sales from real estate.
- At least 90% of the company's taxable income is in the form of dividends distributed to shareholders annually.
- The company should be an organisation that is treated as a corporation in terms of taxes.
- The company should be managed and maintained by a set of board of trustees or directors.
- The company should have at least 100 shareholders receiving dividends each year.
- There should be no more than 50% of shares being held by less than five or five individuals.
Final Thoughts
Investors who are looking for passive income should consider investing in REITs, as it has for many years shown outstanding performance by outperforming the stocks and bonds market.
The smartest way to make your first investment is by getting in touch with a trusted license broker or financial adviser. This step will give you a heads up of what you are about to get and will establish your expectations being an investor.
Checking BURSA Malaysia for the latest performance on Malaysian REITs is a good way to get started on your research, as is researching the latest performance on each different type of REIT.
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(Written by G. Zizan, 12 November 2019)
