Real estate has been a great way for people to make money for generations. However, property acquisition and management are a large financial barrier for many people. Don’t worry! There is another way to make money in real estate without a massive initial investment: REITs.
So what is an REIT? It stands for Real Estate Investment Trust. In a sentence, an REIT is a company that makes money in real estate that you can invest in and get a return, based on the companies success. They were established in 1960 by congress as a way for anyone to be able to make money from the real estate industry. There are risks associated, just as there are with any investment, but there is also a high potential for returns on investment.
So what are some benefits of this investment type? For one it is a rare example of fully passive income. Once you contribute an investment, no further action is required on your part. They also have higher average returns than most stock market investing.
REITs are classified into two main categories:
Equity REITs own many different types of property, from apartments and office buildings to storefronts and hotels and others. Their primary earnings come from rent on those properties.
Mortgage REIT’s earn by financing residential properties and collecting revenue from interest, rather than from renting.
Within these two categories, there are three ways they can be registered:
Publicly registered with the SEC and traded on major stock exchanges
Publicly registered but not listed on major stock exchanges
Privately owned and not registered or traded on major exchanges
Publicly traded REITs are the easiest to purchase and sell, as they are listed on major exchanges. They tend to have lower returns, but are more liquid and usually have a lower minimum to buy-in.
Publicly registered, but non-listed RIETs have higher buy-in (usually at least $1,000) and may have brokerage fees, depending on the company. The assets are less liquid, but they still follow REIT codes laid out by congress in 1960
Privately owned REITs are exempt from congressional REIT laws since they are not registered with the SEC. Their minimum buy-in can be as low as a non-listed company, but they can also get much higher depending on the company.
Under federal tax codes REITs are required to distribute 90% of their taxable income back to shareholders, which means if the company does well, the shareholders don’t get left behind.
In conclusion, REITs are a great way for “the rest of us” to get a piece of the money to be made in the real estate industry. The real estate market has it’s ups and downs, but always seems to bounce back up with time. There are risks associated, as with any investment, however, if you were trying to find an investment type with a higher than average earning potential, this could be the answer.
I hope this gave you a better idea of what an REIT is, and good luck patching your pocket!