How To Invest in Real Estate Investment Trusts for Passive Income
What is a ‘Real Estate Investment Trust – REIT’
A real estate investment trust, or REIT, is a company that owns, operates or finances income-producing real estate. For a company to qualify as a REIT, it must meet certain regulatory guidelines. REITs often trades on major exchanges like other securities and provide investors with a liquid stake in real estate.
BREAKING DOWN ‘Real Estate Investment Trust – REIT’
REITs are not a new financial innovation. Established by Congress in 1960 as an amendment to the Cigar Excise Tax Extension of 1960, REITs operate in a manner comparable to mutual funds as they allow for individual investors to acquire ownership in commercial real estate portfolios that receive income from properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.
Most REITs specialize in a specific real-estate sector – for example office REITs or healthcare REITs. Within this space, REITS must purchase and operate its holdings as a part of its portfolio. In most cases, REITs operate by leasing space and passing on collected rent payments to its investors in the form of dividends.
REIT Guidlines
A company must meet the following requirements to be qualified as a REIT:
Invest at least 75% of its total assets in real estate, cash or U.S. Treasuries
Receive at minimum 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
Be an entity that is taxable as a corporation
Be managed by a board of directors or trustees
Have a minimum of 100 shareholders
Have no more than 50% of its shares held by five or fewer individuals
Different REIT Categories
REITs typically fall within three categories.
Most REITs are equity REITs. Equity REITs invest in and own income-producing real estate properties and give investors the opportunity to invest in these portfolios. They must distribute at least 90% of the portfolio’s income to its shareholders in the form of dividends.
Mortgage REITs invest in and own property mortgages. These REITs loan money to real estate owners and operators not only for mortgages but also for different types of real estate loans or through purchasing mortgage-backed securities. Their earnings are generated primarily by the net interest margin, the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
Hybrid REITs invest in both properties and mortgages.
How to Invest in REITs
Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. Some REITs are SEC-registered and public, but not listed on an exchange; others are private.
Many REITs will invest specifically in one area of real estate—shopping malls, for example—or in one specific region, state or country. Others are more diversified. There are several REIT ETFs available, most of which have fairly low expense ratios. The ETF format can help investors avoid over-dependence on one company, geographical area or industry.
(Information from https://www.investopedia.com/terms/r/reit.asp)
What is ‘REIT ETF’
REIT ETF is exchange-traded funds that invest the majority of assets in equity REIT securities and related derivatives. REIT ETFs are passively managed around an index of publicly traded real estate owners; indexes may vary from provider to provider but two popular benchmarks are the MSCI U.S. REIT Index and the Dow Jones U.S. REIT Index, both of which cover about two-thirds of the aggregate value of the publicly-traded REIT market domestically. REIT ETFs are characterized by their above-average dividend yields.
(Information taken from https://www.investopedia.com/terms/r/reit_etf.asp)
List of Real Estate Investment Trusts
CLICK HERE to get a list of real estate investment trusts
Conclusion
Real estate investment trusts are a way for an investor to start getting into the real estate market without putting down a 30% down payment.
With any investment there is risk, so do your research and see if investing in REITs is right for you!
As a passive income investor, I create passive income for myself and my family. In 2016 I quit my bank job to become a part time investor, part time finance freedom coach, and full time mommy =)
If you are interested in creating Financial Freedom for yourself and your family and want to do it with the guidance of caring and effective mastermind, then CLICK HERE, enter your first name and best e-mail address, and watch the free video!
PLEASE READ THE IMPORTANT DISCLOSURES BELOW.
This commentary provided by Yes Financially Free is for educational purposes only. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by Yes Financially Free or its affiliates. No information presented constitutes a recommendation by Yes Financially Free or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy.
Full portfolio management and advisory services are offered through an investment adviser registered with the Securities and Exchange Commission.
Data and statistics contained in this commentary are obtained from what Yes Financially Free considers to be reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.
Investing in securities involves risk, including possible loss of principal.
Past performance is not an indication of future results.
Diversification, asset allocation strategies, automatic investing plans and dollar-cost averaging do not ensure a profit and do not protect against a loss in declining markets. Investors should consider their financial ability to continue their purchases through periods of low price levels.
Stocks fluctuate in response to the activities of individual companies and general market conditions, domestically and abroad. Investments in mid and small-cap stocks typically have higher risk characteristics than large cap stocks and may be subject to greater price fluctuations than large-cap stocks.
All bonds and fixed income products are subject to a number of risks, including the possibility of issuer default, credit risk, market risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Lower-quality fixed-income securities generally offer higher yields, but also carry more risk of default or price changes due to potential changes in the credit quality of the issuer. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities and, as a result, they may have a higher probability of default.
Foreign investments may involve greater risks than U.S. investments, including political and economic risks, concentration risks, liquidity risks, and the risk of currency fluctuations, all of which may be magnified in emerging markets. Emerging and frontier market investments are subsets of foreign investments. Emerging markets are rapidly developing politically and economically, but present a greater degree of these foreign investment risks because of the developing stage of the emerging market. Frontier markets are in early stages of economic and/or political development and are even less developed than emerging markets. As such, risks associated with foreign investments may be significantly greater in a frontier market compared to emerging markets and foreign investments generally.