Real Estate Investment Trusts: The Basics

REITs, or Real Estate Investment Trusts, are a popular way to invest in real estate. An REIT is a company that invests and manages in investment properties, pooling the resources from a group of investors. This makes it possible for individuals to take part and benefit from real estate investment without having to do any of the buying, selling or managing of properties directly. REITs are generally considered low-risk, but not all of them are equal in terms of success or type of investments. Knowing the differences between the various REITs is crucial in deciding if it’s the right investment option for you.

Retail

A significant portion of REIT investments are in retail properties such as shopping malls and standalone stores. Retail REITs make money based on the rent they charge tenants (stores or businesses). Because they depend entirely on the rent and therefore cash flow and success of many businesses, this could be a risky or safe investment depending on the area. As online shopping overtakes in-person retail shopping, the longevity of this model is something to keep in mind.

Residential

Residential REITs are a much larger version of property management companies you’re likely to encounter running apartment and condo complexes. They specialize in multi-family rental units and manufactured housing. Residential REIT success heavily depends on the areas in which they operate. Typically, the best apartment markets are in places with high property values relative to the rest of the area. Rentals are a popular alternative to those who prefer not to buy property in that location but still want to be nearby. Because of this, residential REITs do well in expensive and densely populated urban markets.

Office

Office REITs invest in office spaces. Similar to retail REITs, they receive rental income from multiple tenants. The necessity for remote work has likely presented a challenge for office REITs, as businesses who have converted to either partial or entirely remote workforces choose not to renew their leases (or sometimes are forced to break them). In any economic climate, for REITs it’s always important to look into metrics like unemployment and vacancy rates for the area you want to invest in.

Healthcare

Healthcare REITs invest in hospitals, medical centers, nursing facilities and retirement communities. Because most entities operating these types of properties rely on funding from a variety of sources, this can make healthcare REITs somewhat unpredictable in a way similar to retail. For example, most medical facilities managed by a healthcare REIT might rely on occupancy fees, Medicaid and Medicare reimbursements and private individual pay. However, medical REIT successes are also dependent on the overall trends of the healthcare industry and the demographics of patients and customers. With a large amount of the population entering retirement age, the demand for nursing, assisted living and similar services could increase. This could make investing in medical REITs a potentially lucrative choice.

Mortgage

Another fairly significant percentage of REIT investments are actually in the form of mortgages rather than actual real estate. Mortgage REITs invest in residential mortgages, commercial mortgages or a combination of both. These REITs provide funding for individual homes and businesses, and generally have solid history of high returns. However, one potential risk to a mortgage REIT would be a large-scale drop in interest rates. These investments make their money based on the net gain from interest rates compared to their costs. Therefore, if interest rates go down, the margin between those two numbers can shrink, leading to lower dividends.

REIT Pros & Cons

All investments have advantages and disadvantages and REITs are no different. Some major benefits of investing with REITs include high-yield dividends and easy portfolio diversification. Some potential issues would be those same high-yield dividends being taxed as ordinary income and risk involved with certain types of REITs. Examples of this could be shopping malls struggling to compete with online retail or hotels during general economic downturn or even off-seasons. As always, if you’re interested in investing, it’s important to do your research to determine which type of REIT might be the best choice for you.