If you think real estate investing is all about buying homes to fix and sell or building huge apartment buildings in emerging neighborhoods, you might be missing out on a few pretty spectacular opportunities. Here, you can learn more about real estate investment trusts, or REITs, and how they can help you generate income right alongside your direct real estate investments.
What is a Real Estate Investment Trust?
To put it as simply as possible, a real estate investment trust is a company that generates income through real estate, and in many cases, it’s often called the mutual fund of the real estate investing world. In other words, if you choose to become part of a REIT, rather than spending only your own money (or your own borrowed money) to fund your investments, your money is pooled with others’ funds and then invested.
The Benefits of REITs
REITs are appealing to real estate investors for a few interesting reasons. These include:
- Affordability. If you are brand new to real estate investing, or if you simply aren’t sure whether real estate investing is right for you, investing through an REIT is typically far more affordable than investing all on your own.
- Liquidity. Another benefit (though some may consider it a downfall) of REITs is their liquidity. For the most part, investing with a REIT is like investing in the stock market. If you decide you don’t want your shares, or your portion of the investment, you can simply sell it to someone else. This is not simple with a physical property that may be difficult and time-consuming to sell.
- Less responsibility. Finally, investors who like the idea of earning an income in the real estate market but who do not want the responsibility of managing, maintaining, fixing, or selling properties themselves may appreciate REITs. They can earn steady income via dividends on their investments without having to worry about buying, financing, or management in any way.
The Potential Drawbacks
There are some downsides associated with investing in REITs, too, so they certainly aren’t for everyone. Some things you should consider include:
- Low capital appreciation. With physical real estate, if you buy a property at the right price and then sell it for the right price, you can make quite a bit of money in a relatively short period of time. With REITs, it’s just the opposite. REITs have to give 90% of their taxable income back to their investors, leaving only 10% to reinvest and buy new holdings, so gains tend to come very slowly.
- Taxed dividends. The dividends you earn from REIT investments will be taxed like any other income, so it’s important to put funds aside for this and anticipate it each tax season.
- There is some risk. Though the risk associated with REITs is much lower than the risk associated with certain other forms of investing, the potential still exists.
- There are typically fees. REITs are an incredibly convenient way to invest in real estate, but in exchange for that convenience, you’ll likely be expected to pay high fees. Transaction and management fees are the most common, but there may be others, as well.
As you can see REITs can be a great way to diversify your real estate investments, particularly if you are new to investing or you simply want to add to your investments without adding any additional responsibility. Otherwise, if you don’t mind the responsibility in exchange for higher profitability, then REITs may not be the best and most feasible option for your needs.