How Do REITs Work?

Around 145 million people in the US are currently invested in REITs.

There are all kinds of assets people can invest in these days, with varying levels of risk and reward. REITs present the opportunity for you to invest in property, without the hassle that comes with property ownership.

So how do REITs work, and would they be a good investment for you? Read through this REIT guide to find out.

What Is a REIT?

A REIT is a real estate investment trust, which is a trust that owns, manages, or finances real estate property. Investors can purchase shares in a REIT to own a portion of the property, and can then make income from these shares.

As REITs make profits, shareholders get a percentage based on the shares they own. This allows investors to make regular passive income, and their shares may increase in value along with the property.

How Do REITs Work?

There are two main types of REITs; mortgage REITs and equity REITs. The type of REIT determines how it generates profits.

If you want to invest in REITs you can do so through a REIT Trading Platform. Many of these may also be able to offer REIT advice so you can find the ideal investment for you.

Mortgage REITs

Mortgage REITs generate profits from the interest on mortgages. When it comes to these types of REITs, commercial properties tend to be more profitable investments than residential ones. This is because have a higher interest rate on their mortgages.

While they’re more profitable, commercial REITs are also riskier. You should take this into account before investing.

Equity REITs

A finished property can be rented out to generate monthly income. REITs will use a portion of this for property management, and the rest can be passed on to the investors. Recent years have seen interest rates drop while rents have been very high, making these more popular than mortgage rates.

For both commercial and residential properties, the tenants pay monthly rent. This covers all expenses of the operation, and then the shareholders receive dividends each year.

Hybrid REITs

While less common, hybrid REITs are available, which generate profits from both rental income, as well as mortgage interest. This makes them suitable for anyone who wants to diversify their portfolio and be better protected from market swings. They’re also ideal for both growth-oriented and income-oriented portfolios.

Benefits of Investing in REITs

There are multiple REIT benefits, with perhaps the most important being passive income. Once you’ve invested in a REIT, you’ll continue to make income from it until you sell it. The amount you make will depend on the REIT itself, which is why it’s important to do proper research before investing.

The IRS makes sure that all REITs have to pay shareholders 90% of their taxable income. This ensures that you won’t be getting a raw deal when it comes to your annual dividends.

If you invest in traditional real estate, selling it can be longwinded. With REIT shares, you’re free to liquidate them at any time. This can be very helpful if you suddenly run into any cash flow issues.

Should You Invest in REITs?

You’re no longer asking “how do REITs work?”, but you may still be unsure about investing. Ultimately, you need to decide based on your current financial state, and where you want to be. As with any investment, there is a degree of risk involved, so make sure you assess this first to determine whether or not you want to invest.

For more lifestyle articles check out some of our other blog posts.