If you haven’t thought much about real estate before, you might see it primarily as something you’d get involved with only if you needed a new house. But investing in real estate is actually a smart financial move, especially with property values rising the way that they have been. Investing in real estate doesn’t necessarily mean you have to buy a property directly and become a landlord, either; if you want the financial advantages of investing in real estate without the hassle, then a real estate investment trust, or REIT, may be for you. Here’s what you need to know about these trusts:
What a REIT Is
A REIT is, essentially, a security. It sells on major exchanges, just like a stock, but directly invests in real estate. It typically does so through one of three routes: equity, meaning the REIT invests in properties and sees revenue based on the rents of those properties; mortgage, meaning the REIT loans money for mortgages and sees revenue based on the interest for those loans; or a hybrid, combining aspects of both equity and mortgage REITs.
Why Invest in REITs
REITs have become very popular in recent years because they offer high dividends plus slow-but-steady long-term appreciation opportunities. REITs must, by law, distribute at least 90% of their annual taxable income to shareholders, meaning that they tend to pay higher dividends than other companies. Investors also like them because they can be easily liquidated to cash (by being sold on the major exchanges), and because they’re typically managed by real estate professionals who know all the ins and outs of the market.
How to Invest in REITs
There are essentially two ways to invest in a REIT. The first is to buy shares in a publicly listed REIT on an exchange, as we’ve discussed above. The other option is to invest in a mutual fund specializing in real estate. REITs can be assessed by the same measures as other stocks and funds, including anticipated growth and consistency.