A real estate investment trust (REIT) is a company that owns and operates real estate properties. These properties can be apartments, hotels, office buildings, warehouses, or other real estate assets. The REIT management team buys the property and then leases it back to tenants under long-term lease agreements. The ownership of the trust is broken up into shares (also called units), which are essentially trusts that own the properties. Each share represents an equity stake in a particular property. If you buy shares of a REIT, you’re essentially buying a piece of real estate without needing to directly own it yourself. This is done for two reasons: diversification and liquidity.
Why Invest in Real Estate with a REIT?
The real estate market is large, slow-moving, and volatile. But overall, it’s a relatively safe investment, since most real estate assets are hard to destroy and have a long lifespan. A real estate investment via a REIT is a way to get the benefits of “owning” real estate without having to take on much of the downside risk. The REIT will manage the property, take care of all the day-to-day operations, and oversee the financing of the property. You’ll also get a portion of the profits from the property through cash dividends. REITs are also a way to get diversification if you don’t want a large amount of your money tied up in one asset. Owning a small percentage of a large number of properties will lower the risk that a single investment will go south and wipe out your entire portfolio.
Why Hold Real Estate with a REIT?
Real estate is a long-term investment that can potentially provide you with income either from rents, sales, or mortgage repayments. A REIT is a way for you to participate in the real estate market without having to directly own the building, manage the tenants, or deal with the ongoing maintenance required. A REIT’s management team will handle all of the day-to-day operations of the property, like finding tenants and maintaining the building. You’ll get a share of the profits from the property through cash dividends. REITs are also a way to get diversification if you don’t want a large amount of your money tied up in a single asset. Owning a small percentage of a large number of properties will lower the risk that a single investment will go south and wipe out your entire portfolio.
How to Buy Shares of a Real Estate Investment Trust
Shopping for a REIT share is a bit different than shopping for stock. You’ll need to find a broker that deals with REITs and will be able to help you pick the right kind of shares for you. For most investors, the best bet is to go with an exchange-traded fund (ETF). ETFs are funds that own shares of many different companies. REIT ETFs own shares of REITs, so you don’t have to go out and pick specific REITs to buy. You’ll also likely have to pay a brokerage fee for each trade you make. This fee is usually small, but it’s something you’ll have to keep in mind when purchasing shares of a REIT.
Pros of Owning Real Estate via a REIT
A REIT is a safe investment - REITs are invested primarily in real estate, which is normally a safe asset. There are risks, but the overall market is normally steady.
A REIT is a great way to diversify - Owning a small percentage of many properties will lower the overall risk that a single investment will go south and wipe out your entire portfolio.
A REIT has large economies of scale - Fund managers will run a larger REIT with a similar strategy as a smaller one, but they have the resources to buy bigger properties.
A REIT pays out cash dividends - You’ll be paid a percentage of the profits that the REIT makes from managing the properties.
Cons of Owning Real Estate via a RE-IT
A REIT owns multiple properties - You don’t have control over which properties the REIT owns, which means you don’t know exactly what’s in your portfolio. You have to trust that the REIT managers are making good decisions and diversifying your investment enough. A REIT’s managers may not be as efficient as you would be - You can’t control the property directly. You have to trust that the REIT will be good at managing the building, finding tenants, and taking care of maintenance. A REIT is a long-term investment - REITs are generally long-term investments, so you’ll have to be willing to wait a long time (decades, even) before you see a return on your investment.
Final Words: Is a Real Estate Investment Trust Right for You?
There’s no one-size-fits-all investment, and a REIT may not be the right choice for you. It all depends on your risk tolerance, your investment goals, and how willing you are to wait for your money to grow. A REIT is generally a safe investment, but the specific REIT you invest in may not be. You’ll need to do your research before you buy. If you’re looking to invest in real estate but don’t have the cash to buy a house or the equity to go into a commercial building, a REIT may be your route to getting exposure to the real estate market without having to go through the trouble of buying a property directly.
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