Investing in real estate trusts

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They own the underlying real estate, collect rent checks, provide upkeep and reinvest into the property. Instead, they own debt securities backed by the property. For example, when a family takes out a mortgage on a house, this type of REIT might buy that mortgage from the original lender and collect the monthly payments over time, generating revenue through interest income. Meanwhile, someone else — the family, in this example — owns and operates the property.

These businesses own and operate real estate properties as well as own commercial property mortgages in their portfolio. Be sure to read the REIT prospectus to understand its primary focus. Real estate vs. Publicly traded REITs tend to have better governance standards and be more transparent.

Most REITs are publicly traded like stocks, which makes them highly liquid unlike physical real estate investments. REITs invest in most real estate property types, including apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses. The provision allows investors to buy shares in commercial real estate portfolios —something that was previously available only to wealthy individuals and through large financial intermediaries.

Properties in a REIT portfolio may include apartment complexes, data centers, healthcare facilities, hotels, infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses. In general, REITs specialize in a specific real estate sector.

However, diversified and specialty REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties. Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session.

These REITs typically trade under substantial volume and are considered very liquid instruments. Most REITs have a straightforward business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.

Mortgage REITs don't own real estate, but finance real estate, instead. These REITs earn income from the interest on their investments.

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Healthcare REITs invest in the real estate of hospitals, medical centers, nursing facilities, and retirement homes. The success of this real estate is directly tied to the healthcare system. A majority of the operators of these facilities rely on occupancy fees, Medicare and Medicaid reimbursements as well as private pay.

As long as the funding of healthcare is a question mark, so are healthcare REITs. Things you should look for in a healthcare REIT include a diversified group of customers as well as investments in a number of different property types. Focus is good to an extent but so is spreading your risk. Generally, an increase in the demand for healthcare services which should happen with an aging population is good for healthcare real estate.

Therefore, in addition to customer and property-type diversification, look for companies whose healthcare experience is significant, whose balance sheets are strong, and whose access to low-cost capital is high. They receive rental income from tenants who have usually signed long-term leases. Four questions come to mind for anyone interested in investing in an office REIT. What is the state of the economy and how high is the unemployment rate? What are vacancy rates like? How is the area in which the REIT invests doing economically?

How much capital does it have for acquisitions? Try to find REITs that invest in economic strongholds. It's better to own a bunch of average buildings in Washington, D. The best known but not necessarily the greatest investments are Fannie Mae and Freddie Mac. They are government-sponsored enterprises that buy mortgages on the secondary market. Just because this type of REIT invests in mortgages instead of equity doesn't mean it comes without risks.

An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower. In addition, mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings.

Should interest rates rise, future financing will be more expensive, reducing the value of a portfolio of loans. In a low-interest-rate environment with the prospect of rising rates, most mortgage REITs trade at a discount to net asset value per share. The trick is finding the right one.

REITs are true total-return investments. They provide high dividend yields along with moderate long-term capital appreciation. Look for companies that have done a good job historically at providing both. Unlike traditional real estate, many REITs are traded on stock exchanges.

You get the diversification real estate provides without being locked in long-term. Liquidity matters. Depreciation tends to overstate an investment's decline in property value. This is defined as net income less the sale of any property in a given year and depreciation. Simply take the dividend per share and divide it by the FFO per share.

The higher the yield the better. Strong management makes a difference. Look for companies that have been around for a while or at least possess a management team with loads of experience. Quality counts. Only invest in REITs with great properties and tenants. One of the biggest benefits REITs have to offer is their high-yield dividends. Another benefit is portfolio diversification.

Not too many people have the ability to go out and purchase a piece of commercial real estate in order to generate passive income. However, REITs offer the general public the capability to do exactly this. Furthermore, buying and selling real estate often takes a while, tying up cash flow in the process.

This means their value goes up while you simultaneously get money from them. The value increases by reinvesting capital gains into property, along with the appreciation of the properties themselves. This is in stark contrast to equity stocks, where the decision to reinvest or pay dividends is decided by management.

In turn, this means income-oriented investors benefit from high dividend rates. A certain flexibility is also inherent, as you can choose to spend your dividend on what you like or reinvest by purchasing more stocks. The only downside is that the yield comes at a cost of interest rate sensitivity.

No Burden of Property Management Investing in your own property has a lot of benefits. Regular rental incomes and keeping all the profit you make are just a few. However, anyone who has been a landlord knows the hard work you need to put in. Screening tenants, doing maintenance, and chasing rents are not easy tasks. They are time-consuming and can even cost you. With REITs, property managers will run your investment. However, REITs benefit from gradual, steady rises over a long period of time.

There may be times when this rise is less than others, but for a long-term asset it is only going up. Short-term changes in inflation and interest rates will not impact your investment. As more people inhabit the planet, more desire for real estate will become inherent, keeping prices rising. Diversification Every financial advisor would recommend diversifying your assets. Although REITs technically count as stocks, their focus on real estate gives them a different asset class to equities. Equity stocks follow the business cycle.

They go up and down depending upon the current market and its demands. Real estate does not correlate to this. Instead, it follows its own cycle. When equity stocks go down, your REIT investments will be less correlated. It is a great way to consolidate your portfolio with a steady and stable income and assets.