Entrepreneurs and investors alike have been interested in real estate for its potential high returns over the long term. However, traditional investing methods such as buying property can be costly and require significant management. Enter Real Estate Investment Trusts (REITs), a method that democratizes real estate investing. REITs offer an array of benefits, including reducing the barrier of entry to the real estate market and providing regular dividend payments. This blog post aims to guide you on how to invest in REITs and introduce top-performing REITs to watch in the current market.
Understanding REITs: The 'Stock Market' of Real Estate
Without a doubt, real estate is a go-to investment for many people seeking to grow their net worth. But the barrier to entry - high upfront costs, property management and dealing with tenants, can be overwhelming for many potential investors. This is where Real Estate Investment Trusts or REITs come to the rescue. REITs can be thought of as the 'stock market' of Real Estate - they are companies that own or finance income-producing real estate, and you can buy shares in a REIT, giving you a slice of their income through regular dividends.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries - through purchasing stocks. In other words, when you buy a share of a REIT, you are essentially buying a physical asset that has a real, tangible value - walls, roofs, and land. This is similar to owning equity in a company, where the stock represents a piece of the company’s assets and earnings.
How to Invest in REITs
Understanding how to invest in REITs is key to capitalizing on this potentially lucrative market. The process is fairly straightforward and accessible to anyone who has ever traded stocks. The first step in investing in REITs is to open a brokerage account if you don't already have one. With an online brokerage account, you can buy and sell securities like stocks and REITs.
You might want to start your journey in investing in REITs by doing thorough research. This usually involves analyzing financial statements and understanding key metrics for evaluating REITs, such as Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), and the REIT's debt level, amongst others. Once you have picked a REIT that aligns with your investment goals, you can proceed to buy shares in the REIT from your brokerage account.
Many investors are attracted to REITs due to their high dividend yields. By law, REITs are required to distribute 90% of their income to shareholders in the form of dividends. This makes REITs a popular choice among income-focused investors.
Top Performing REITs to Watch
Like stock markets, there are winners and losers in the real estate market too. Staying informed about top-performing REITs is vital for those who want to invest in this sector. The next section of this blog will discuss the top-performing REITs to watch for potential investment opportunities.
Understanding REITs better
Real Estate Investment Trusts, also known as REITs, are investment vehicles that operate and invest in real estate properties. REITs offer an opportunity to invest in real estate without the need for direct ownership, providing a pathway for ordinary investors to access high-level, investment-grade real estate that would otherwise be out of reach. In many ways, they present a form of democratization of real estate investing. But how do they work?
In essence, REITs are corporations, trusts, or associations that own and, most often, operate income-producing real estate. These can include but are not limited to, office buildings, shopping centers, apartments, resorts, warehouses, and even mortgages or mortgage security. Much like a mutual fund, REITs pool money from an array of investors to manage and expand a portfolio of properties.
These investment devices allow individual investors to earn a share of the income produced through commercial real estate ownership, without actually having to go out and buy commercial real estate. So, essentially, they offer a way for someone to invest in commercial real estate alongside other investors, in the same way, mutual funds provide for investment in stocks.
How to Invest in REITs
Investing in REITs is quite simple and parallels the process of investing in stocks. The majority of REITs are publicly traded on the major stock exchanges, meaning individual investors can buy shares through a brokerage account. Initial investments can be modest, making it accessible for most investors.
The Pros and Cons of REITs
As with any investment, there are both advantages and challenges associated with REITs. On the positive side, REITs offer the potential for high total returns and have been a reliable source of dividend income. They also provide an easy and liquid means to diversify an investment portfolio with real estate exposure. Besides, they are a suitable option for long-term, buy-and-hold investors because of their regular income streams.
However, on the flip side, REITs can be highly sensitive to interest rate fluctuations. As rates rise, the value of the properties owned by the REIT might diminish, triggering a decrease in the value of the REIT's shares. Furthermore, since REITs are tied to the real estate market, they are subject to property market fluctuations which can impact the returns.
Final Thoughts
For an investor looking to diversify their portfolio while gaining exposure to real estate, REITs may present a viable option. By offering the chance to invest in real estate, without the associated headaches of direct ownership, REITs have democratised the real estate investment landscape. As with all investments, understanding REITs is important before making any decisions, so always make sure to do your homework and consider your own financial goals first.