In this article, I will share how to invest in a real estate investment trust or REIT. But, let me tell you, a REIT is not a real estate investment. It’s a stock traded in the stock market and regulated by the exchange security like a company’s stock.
How to Invest in a Real Estate Investment Trust (REIT)
Here are the ten points you should always keep in mind when investing in a REIT. Let’s start with the first one.
Table of Contents
What is a Real Estate Investment Trust?
REIT or real estate investment trust is a form of online property investment in which you can put your money and get good cash flow from it. It’s like a stock trade via the stock market, like a normal share.
The only difference between a real estate investment trust and a normal stock is that REITs invest their money in a commercial rental house, not like in the whole business.
That is why when you buy a REIT, you must analyze both the property market and the stock market to make a profit. Real estate is a very stable sector. You will earn good money if you hold it for the long term. There are lots of advantages and disadvantages that you must know before you invest. Let’s have a look at those.
The Big Advantages of REITs
The best part of these REITs is that it is getting famous, all over the world. Because it gives total flexibility, such as:
- It gives 90% of its distributable dividend to its investors.
- REITs are super liquid investments, not like traditional property investments. You don’t have to wait months to sell a property. You can sell it in seconds with just a click.
- You only need $1,000 to invest here, not $100,000 if you purchase a big house down the street.
These three advantages are enough to attract a newbie investor, I think.
Should I Invest in A REIT?
Maybe or maybe not. It depends, it depends on various factors. It is the kind of investment that you need to analyze both the real estate and the stock market part to make a profit.
Just doing fundamental analyses or technical analyses might not work. It is a whole new game. All the data are available on the REIT official site. But, you need to analyze the company which is offering this type of investment. Analyze at least 20 years of data.
How to Analyze A REIT?
On the real estate side, analyze these:
- The occupancy rate of the building
- Demand and supply of the market
- The location
- Type of investment
- Current real estate market
On the stock market side, analyze these:
- Company fundamentals
- Price to earnings (P/E) ratio
- Return on equity
- Price to book (P/B) ratio
- Price-to-sales ratio
- Dividend payout ratio
- Dividend yield ratio
- Managements
- Last 20 years of performance
- Profit and loss
Do the fundamental and technical analysis properly before you invest. Otherwise, you may lose money.
The History of Real Estate Investment Trust
The first REIT came in into existence in 1960 in the United States. Their main motto was to boost the real estate sector as most retail investors were investing in the stock market. After this move, the real estate sector boomed, and people become more interested to invest in a real estate investment trust.
Types of REITs
There are mainly three types of REITs
- Equity REITs: Invest in rental property.
- Mortgage REITs: They give property owners loans and earn interest with them.
- Hybrid REITs: It’s a combination of Equity and Mortgage REITs.
Most of the REITs you see today are equity REITs. They give a constant cash flow every year, and people love this.
How to Invest in a REIT?
If a company wants to build a REIT to collect money from retail investors via an IPO, then it must follow these rules:
- Distribute 90% of the REIT’s distributable dividend to its shareholders once or twice a year.
- Use 80% of the total money in income-generating property, like a rental property, commercial or residential.
- Use only 10% in an under-construction property.
- The company must have about sufficient asset value in total.
- Update the NAV (net asset value) twice a year.
If a company does not follow these five rules, they are not eligible to create a REIT. You must verify all these before you invest. If all these seem good, then you have a green signal you can move forward.
How Does A REIT Work Exactly
A REIT collects money from investors and then buys commercial properties and generates income. That’s the basic formula of REIT investment.
But you will lose money if the occupancy rate goes down. If the demand and supply do not match, REITs can go backward, and you may lose some money. It all depends on the market condition.
Bank interest also affects the value. If the interest rate goes down people will buy more properties rather than rent them. That’s why it will generate less income.
Most people use it as a second source of income, or to diversify their portfolios. It is a good investment if you don’t worry about the market condition. Because ultimate in the long term this will give you a good return.
Is it a Mutual Fund?
People think that it’s a mutual fund, but it is not. Seem like a fund, but it is not. The rules and regulations are a little different with no Hidden charges as we can see in mutual funds, there are hidden charges that drain your profits. But, it will give you whatever you deserve without any hidden charges.
Before You Invest
A real estate investment trust is a type of real estate. When you invest, make sure you analyze it like property.
- The occupancy rate
- The demand and supply
- The local area
All of these will have an effect on the performance of the REIT.
Most investors make this mistake. They do the technical analysis but forget the real estate due diligence. I think both are required to invest in REIT. Yes, it is stock, but to get continuous dividends and capital gain appreciation analyze it properly.
Think of it as a combination of stock and real estate. That way, your investment will go the right way, I think.
Last Words
A real estate investment trust or REIT is a very good investment, friendly for a beginner investor.
- You can invest here with just $1,000.
- It will give a secure dividend or cash flow every year.
- No hassle during investment.
- Super liquid, can sell it any time.
- Become popular among the youngsters.
If you want to invest in REITs, make sure you do the due diligence property, I am not recommending you to invest, it is your choice. But, it is a good investment.
Should you invest in a REIT?
Maybe or maybe not, as just doing fundamental analyses or technical analyses might not work. It is a whole new game that requires real estate industry knowledge.
What are the advantages of REIT?
REIT gives 90 percent of its distributable dividend to its investors, it is a liquid investment, and you only need $1,000 to invest here.
Is REIT a mutual fund?
No, it is not. The rules and regulations are a little different in REIT than in a mutual fund. It is similar but different.
What is a REIT?
REIT or real estate investment trust is an online property investment in the stock market where you can earn dividends per year by investing here.
How does a REIT work?
A REIT collects money from investors and buys commercial properties and generates rental income and distributes that income to its investors.
