If you’re thinking of investing in real estate and have never ventured into this territory in your life, investing in a REIT may be a good initiation into this potentially lucrative investment opportunity. A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate.
REITs can be described as a mutual fund for real estate. Numerous investors come together to contribute money to a pool to buy shares–which professional managers invest on their behalf. REITs provide investors with the opportunity to own as well as invest in real estate.
REITs invest in a range of real estate property types. This includes offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, infrastructure and hotels. Some REITs focus on a particular property type, while others hold an assortment of different types of property classes in their portfolio.
Historically, REITs have delivered competitive total returns, based on both high, steady dividends as well as capital appreciation. In accounting terms, land-related investments are long-term assets and unlike trading, the key takeaway here is to invest with a long-term horizon in mind. REITs are considered to counterbalance investments in stocks, bonds, and cash.
One of the main advantages of investing in REITs is that unlike traditional real estate, many REITs are traded on the stock exchange. This provides liquidity as investors can hone in on the potential of the real estate market without being locked for the long-haul. As not everyone has the capacity to purchase a piece of commercial real estate to generate passive income, REITs offer opportunities to investors who do not have the significantly large capital outlays that investing in traditional forms of real estate requires.
REITs can be privately held or publicly traded. REITs that are listed on the stock exchange are publicly-traded companies with the goal to maximise shareholder value. They position their properties to attract tenants, earn rental income while managing their property portfolios. Statistics by NASDAQ indicate that in the US, approximately 24% of REIT investments are in shopping malls and freestanding retail.
Regardless of the type of REIT an investor chooses to invest in, it is imperative that investors keep an eye out for population and job growth.
For risk management purposes, each type of REIT has its own risks and upsides depending on the state of the economy. Due to the relationship that real estate has with interest rates, REITs may lose value as interest rates rise, sending investment capital into bonds.
Some investments yield cyclical returns, while others provide a more steady stream of income. For instance, hotel properties are largely considered an unsafe place to park your money during an economic downturn–the pandemic is a case in point. Income generated from other types of real estate (e.g health care) may be less cyclical and can provide some cushioning during a recession.
A truism among entrepreneurs and investors is that the best time to invest is during a downturn–not an upturn. Market sentiment has historically been known to shift from one sentiment to another quite quickly and irrationally. After a dip, recovery follows–which can lead to a sudden surge in consumer demand.
We cannot expect exponential returns unless we are willing, ready and have the mental discipline to take on risks when others are seeking shelter.