REITs: A Way to Invest in Real Estate Without Holding Properties
By Dr. Teresa R. Martin, Esq.
Investing in real estate is a safe way to make a long-term investment. This market typically carries profitable returns and allows you to diversify your portfolio if you’ve already invested in stocks and bonds.
However, investing in traditional real estate isn’t like trading regular financial products. Owning a property means you’ll have to pay taxes, cover maintenance costs, manage it, and put in many hours as a landlord. Besides, real estate isn’t liquid and carries some risks, since so much money is likely tied up in your property.
What if you could reduce your exposure to risks and invest in real estate without having to hold or manage a property? The good news is you can! Invest in a Real Estate Investment Trust (REIT). If you’re new to real estate and aren’t sure how to find good investment properties, shares of an REIT are your best option.
How Does an REIT Work?
A Real Estate Investment Trust, or REIT, is a fund that purchases properties. The company that manages the fund takes care of maintaining the properties, managing, and renting them. A portion of the revenues is then distributed to shareholders who invested in the fund.
Most REITs specialize in one market. These funds give you the possibility to invest in one type of real estate such as industrial properties or office buildings or to buy shares of a residential project.
What are the Benefits of Investing in an REIT?
There are several advantages to adding shares of one or more REITs to your portfolio:
Passive income. REITs provide you with a regular income without having to actively manage your investments.
You can invest in multiple properties. For example, you can find REITs that give you exposure to industrial real estate, commercial projects such as malls, office buildings, or residential buildings. Building such a diverse portfolio while actually holding properties is very difficult and takes years.
High liquidity. You can sell your shares or decide to invest in more at any time.
Protection against high interest rates. While products such as bonds typically lose some of their value when interest rates go up, REITs tend to gain value. High interest rates mean the economy is in good shape, which results in higher rent, higher occupancy rates for residential rental properties, and high demand for commercial and industrial properties.
Ease of diversifying your portfolio. The wide range of REITs makes it easy for you to build a diverse portfolio. You can invest in several different types of properties and gain exposure to real estate markets both in the country and abroad.
A Few Things to Watch Out For
Not all REITs make a good addition to your portfolio due to poor performances.
These are the most common issues with these funds:
Unprofitable locations of the properties. Some REITs don’t perform well due to poor location of the properties the fund invested in.
Bad management. Some bad management practices can result in loss of revenues. Ensure the fund you invest in includes properties that are actively managed and renters are treated fairly.
Past profitability. Check price and revenue history to get a better idea of how an REIT has been performing before you invest.
REITs are a great addition to your portfolio if you want exposure to real estate markets without owning and managing a property. These funds are very accessible to novice investors, but it’s important to select a fund that performs well.
When investing in REITs, a wise strategy is to build a diversified real estate portfolio, either by choosing a number of REITs that each specialize in one type of real estate, or by investing in larger funds that cover different markets.