What is an REIT?
REIT stands for Real Estate Investment Trust. These are a main consideration when it comes to equity or creating a fixed income portfolio. They typical own or manage some sort of commercial real estate property that is producing income. There are several types of REITs which we will go a little deeper in to later.
Why Invest in REITs>
Why invest in REITs? Well, for one, they look good because they offer higher diversity as well as better turns and possibly a lower risk factor. They are also a good counterbalance to stocks, bonds and cash. This is because they can generate income and capital when needed. Every portfolio should have REITs included in order to be a well rounded portfolio.
How to Invest in REITs
When looking into how to invest in a REIT there are a couple things you should know. There are many different types of REITs and how you invest in them varies. For example:
- Retail REITs
This covers about 24 percent of REIT investments. Retail REITS include shopping malls, grocery stores and other retail branches. It is the biggest type of investment in all of America. Pretty much all shopping malls are owned by an REIT. Retail REITs make money by charging rent to the shop owners. This is why, if you choose to invest in a retail REIT then you need to make sure that the company you choose has very strong tenants who will not default on payments which could lead to bankruptcy. While these type of REITs are very popular, they hold a high degree of risk because they are consumer based; meaning that if customers are not buying, owners will not be paying rent and the REIT is out of luck. The success of these REITs are very much based on the economy.
- Residential REITs
A residential REIT typically owns rental apartment or condo buildings and manufactured housing as well. Markets are usually best around places where the affordability is low in comparison to other states. Large inner city places like San Francisco and New York, the cost of living is a lot higher and buying a house is almost impossible because of the prices so it makes people rent. The problem with renting is that landlords tend to raise the rent every year. Because of this, residential REITs usually narrow their focus to urban areas. In order to make sure you are investing in a good residential REIT you have to keep an eye out for growth in the population and job opportunities.
- Medical REITs
As medical benefits and health care keep rising, healthcare REITs will become a more common and popular entity to portfolios. These kind of REITs invest in places like hospitals, retirement facilities, nursing homes and medical clinics. The most important things to have in a medical REIT are things like varied customers and investments and properties. When there is a higher demand for medical supplies and services, this is good the REIT that is in conjunction with it. Balance sheets should be good and strong and capital high and inexpensive.
- Office REITs
This is exactly what it sounds like; office buildings. Long term contracts are signed with tenants who pay rent. The state of the economy plays a big part as well as the unemployment rate and vacancy rates. That really sets the tone for how REIT investments do all the way around but especially for office REITs. If you are still wondering why invest in REITs then office REITs are a good low risk way to start looking into it.
- Mortgage REITs
This is about 10 percent of the REIT investments. Fannie Mae and Freddie Mac are examples of common mortgage REITs. They buy mortgages, particularly in the market for second mortgages. Another way to explain it is that this kind of REIT makes its investments in mortgage rather than equity but there are still a lot of risks. If interest rates increase then that means the REIT values could drop as well as stock prices.
There’s a lot more to understand about REITs that what this article has time for but this is a good introduction to the main types and an explanation as to why invest in REITs.