When it comes to investing, putting funds into real estate has long been a way people across the country have made substantial profits. However, while you might be keen to join their ranks and invest your money into housing or another type of property, if you’re like many Americans, you might be putting this off because you don’t have enough funds available to buy something, even if you did get a hefty mortgage.
Furthermore, you could be worried about your lifestyle being compromised if you have to put a large proportion of your income towards paying off a loan. As well, you might find yourself in the position of being self-employed, having a poor credit rating, not being in a job for long, or otherwise finding it tricky to get a loan approved at a bank or other lending institution.
If so, perhaps it’s time to consider another option. It is possible to invest in real estate without tying up all your money in a property – real estate investment trusts (REITs) can make this a simple and straightforward prospect. To decide if this investing option is the right one for you, read on for the lowdown on REITs.
An Explanation of Real Estate Investment Trusts
An REIT is a type of investing structure in which money is put into buying and/or managing income-producing real estate. These trusts are a little like ETFs and mutual funds, but rather than money being invested into stocks, it’s put into buying a portfolio of properties and/or mortgages which are designed to produce income. The properties themselves, or the mortgages on them, can be the asset which is managed by the trust. Members of the trust then earn a share of the income produced each year.
Real estate investment trusts can place their money into any type of property, but most often they buy commercial real estate like malls, hotels, office buildings, apartments, and so on. One of the benefits of this is that investors get to have their money invested in large-scale, income-producing real estate, but don’t have the hassle or cost of maintenance, repairs and rentals to look after themselves.
REITs don’t typically develop and resell properties since the assets are bought and held as part of an investment portfolio. Note, too, that real estate investment trusts, to qualify as such, must have at least 100 shareholders, with no five of these owners possessing more than 50 percent of shares amongst them. At least three-quarters of the trust’s assets must be invested in property too, for the structure to be qualified as an REIT.
The History of Real Estate Investment Trusts
Real estate investment trusts have actually been around for a long time. In 1960 legal authority was granted by Congress to form REITs, as an amendment to the Cigar Excise Tax Extension. The REIT Act title was signed into law by the then-leader, President Eisenhower. This development gave all investors, large and small, the chance to invest in expensive, diversified portfolios of income-producing real estate.
The first REITs were launched between 1960 and 1961. They were Bradley Real Estate Investors, First Mortgage Investors, Continental Mortgage Investors, Washington REIT, First Union Real Estate (now Winthrop Realty Trust) and Pennsylvania REIT. Some of these are still even trading today on the New York Stock Exchange (NYSE).
The first to be listed was Continental Mortgage Investors, in June 1965, and as of 2017, close to 200 real estate investment trusts have been listed on the NYSE. Over the years, REITs have been one of the top-performing asset classes too, averaging close to ten percent returns.
Types of Real Estate Investment Trusts
When it comes to REIT investment options, there are numerous types you can consider putting your money into. For example, you can opt for a publicly-traded real estate investment trust, such as those listed above, or invest in a non-traded trust.
REITs also come in Mortgage or Equity types. Mortgage REITs specialize in borrowing money at low, short-term interest rates in order to buy mortgages on properties which pay higher rates over the long term. Trust members then make profits on the difference between the two rates. Alternatively, Equity REITs own and operate income-producing real estate.
When you’re comparing real estate investment trusts, also be aware that some choose to have a diversified portfolio which includes properties in various asset classes (e.g. retail investments, residential buildings, healthcare properties and the like), while others specialize just in one particular niche. In case you are interested in REITs in a certain jurisdiction, for example in Singapore, you may find more details in this article on REITs and ETFs in Singapore.