Equity and Mortgage REITs and What They Invest in
Real estate investment trusts are types of securities that are traded on the exchanges. They specialize in mortgages and properties.
Equity REITs buy real estate and rent it out. Basically, they invest in and manage rental and commercial properties and earn profits through holding and acquisition. They specialize in certain types of properties such as lodging facilities, office buildings, malls, apartments, and others. Other trusts focus on hotel properties, warehouses, timberlands, hospitals, and other types of real estate. Some trusts are highly specialized while others are more diversified. Thus there are trusts that own different types of buildings and trusts that own apartments or golf courses only. The potential returns vary based on factors such as inflation, appreciation in value, and the sale and purchase of different properties. The main benefits for holders are high yields and preferential tax treatment. This is also a liquid instrument for investing in rental and commercial properties.
Mortgage REITs are different in that they specialize mortgage-backed securities and loans and buy existing mortgages. They earn profits in the form of interest charges instead of buying, managing or holding real estate. There are also hybrid trusts that use a combination of advanced strategies. They invest in mortgages and real estate.
Some real estate trusts are traded on the major stock exchanges. They are privately or publicly held.
Benefits of Investing in REITs
Investors benefit in a number of ways without having to buy commercial real estate. REITs minimize personal risk and are professionally managed. For example, if a person wanted to purchase commercial properties, one option would be to borrow from a bank, credit union, hard money lender, family, or friends. Institutional lenders require that borrowers offer some type of collateral. If the project turns out unsuccessful, the borrower is still required to pay off the loan. And there is a risk of default. Another option is to reallocate funds invested in mutual funds, bonds, stocks, and other instruments. A better idea is to opt for a real estate investment trust. You don’t need a large some of money to earn profits. A few hundred dollars will do. What is more, there is a variety of trusts to choose from, including self storage, health care, industrial and office, and retail REITs. You can choose from retail or residential trusts. The latter specialize in residential properties such as luxury apartment communities and apartment buildings.
REITs are run by professional managers that specialize in equities and mortgage-backed securities. They are responsible for day-to-day operations.
Retail vs. Residential
Residential real estate investment trusts focus on the acquisition, management, and development and redevelopment of apartment communities. Retail trusts invest in commercial properties such as shopping centers, strip malls, regional malls, department stores, and other properties. There are also industrial trusts that focus on the redevelopment, development, and management of rail, airfreight, and manufacturing facilities and warehouses. The facilities are often located in close proximity to railroads, airports, and highways. Some trusts specialize in certain assets while others hold a diversified portfolio of industrial properties and assets. Self-storage REITs are another variety that manages and owns self-storage properties. Storage space is offered to commercial and residential users and is advertised as easily accessible and affordable. Whatever the type of trust, investors benefit from the fact that double taxation is avoided. Unlike buying land and real estate, trusts are very liquid. Portfolio diversification is another reason to choose from different REITs.
Weighing the Pros and Cons
There are pros and cons to take into consideration, and the main downside is that you are not buying or managing real estate holdings by yourself. REITs work like mutual funds. Price fluctuations are also an issue. At the same time, most trusts pay 90 percent of their income in the form of dividends, and many people consider them profitable. This is also a way to diversify your portfolio and reduce risk. For instance, you can own 5 percent of a residential building, 2 percent of a bunch of mortgages, 3 percent of a rental property, and 2 percent of a skyscraper.
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