What is a REIT and Why Should I Care?

A Real Estate Investment Trust, or REIT, is a security that you can buy and sell on a stock exchange similar to a stock. However, a REIT is not a company, but a portfolio of real estate investments that can turn a high yield to investors.

Equity Real Estate Investment Trusts

There are several types of REITs. The first type is an equity REIT, where the REIT owns and invests in a pool of properties. The REIT generally does not manage the properties directly, but instead outsources the management to a professional property manager.

The REIT may be geared towards a specific type of properties, such as apartment complexes, retirement homes, golf courses, or shopping centers, or it may be a general REIT that looks at all types of properties. The revenue generated by the REIT comes from the rents of the property tenants.

The assets are owned by the REIT, which is then traded like a public company. If the REIT is managed well and the properties perform as expected, the profits are passed on to investors in the form of dividends. The REIT may also retain profits for future property purchases and upgrades.

If you are interested in investing in real estate but do not have the assets to purchase an investment property yourself, this is a great option to get started.

Mortgage Real Estate Investment Trusts

Another type of REIT that does not directly invest in properties is called a mortgage REIT. Like the name implies, a mortgage REIT loans money for mortgages and other real estate investors to use for property purchases. The majority of income comes from interest on those loans.

REITs can purchase existing mortgages from financial institutions or lend funds from its own asset pool. Like equity REITs, mortgage REITs are publically traded entities and return profits to investors through dividends.

Are REIT Investments Right For You?

Whether you are a new investor or an experienced one, REITs can make up an important part of your portfolio. And, if you are not ready to buy your own apartment building or rental properties, you can buy “stock” in a REIT starting around a few hundred dollars.

If you are on the fence, consider this. If you own your own investment property, you get 100% of the profits, but take 100% of the risk. With only one investment property, if something goes wrong, you bite the bullet. If you are able to own several properties, your risk is spread out.

With a REIT, you are instantly diversified. However, you are also trusting the REIT managers to do their job well. Not all REITs are created equal. If you do decide to invest in real estate through a REIT, do your research just as you would when hiring a real estate agent.

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