If you are looking to reap profits by investing in the real estate industry but are not really interested in buying a property, you have the option of investing in REITs. So what are the REITS? As per Wikipedia, “ A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centres, hotels and commercial forests. Some REITs engage in financing real estate.” The REIT tends to provide greater diversification, higher total returns, and lower risks.
Generally, the real estate investment trusts manage and own income-producing commercial real estate properties or the mortgages in these properties. One can try to invest in the companies individually or through an exchange-traded fund or mutual fund. Let's discuss the types of REITs that one can look into for investing:
5 TYPES OF REITs
- Retail REITs:
Studies suggest that about 24% of REIT investments are done in shopping malls and freestanding retail ventures. This depicts that retail/shopping centres are likely to be owned by REIT.
One must always remember that retail REITs make money from the rent they charge from their tenants. If the retailers are experiencing problems in cash flow due to poor sales, there can be a delay or default in monthly payments. New tenants to be found in such situations. It's better to invest in REITs with financially sound tenants only. These also include grocery and utility stores too.
- Residential REITs:
There are certain REITs that own and operate many family rental apartments. For example, the best apartment markets tend to be present at places where it's affordable. The investors should look for a specific market with a steady population and better job prospects. growth.
There is a general net inflow of people in a city because of the steady jobs available in a growing economy. The demand seems to be improving when there is a falling vacancy rate coupled with a few rising rents. If the apartment supply remains low in a particular market, the demand continues to rise. Residential generally do well with all the companies especially the ones with strong balance sheets and steady capital flow.
- Healthcare REITs:
Healthcare REITs are those investment trusts that tend to invest in the real estate of hospitals, medical centres, nursing facilities and retirement homes. The success of this type of real estate is directly linked to the healthcare system. A majority share of these facilities relies largely on occupancy fees, medical reimbursements as well as private visits. The healthcare REITs depend on the funding of the healthcare institutions.
A diverse group of customers with different properties invest in healthcare REITs. What works better for healthcare real estate is an increasing demand for various healthcare services. To diversify the customers it's good to invest in such companies whose healthcare experiences are significant with a deft balance sheet and access to low-cost capital.is high.
- Office REITs:
Office REITs are those which invest in office buildings. They generally receive rental income from the tenant's long-term leases.
- Mortgage REITs:
Studies show that about 10% of the REIT investments are in mortgages as opposed to real estate..
The mortgage REITs come with risks as it involves investment in mortgages instead of equity. An increase in the interest rates results in a decrease in mortgage REIT book values and drives the stock prices lower. Mortgage REITs have the benefit to receive a considerable amount of their capital through secured and unsecured debt offerings. If the interest rates rise, the chances of future financing will likely be more expensive, further reducing the value of loans. The trick to finding the right kind of investment is to invest in a low-interest-rate environment with the prospect of rising rates that most mortgage REITs trade at a discount to net asset value per share.
Are you looking into investing in real estate? What’s your choice: property investment or REITs? Let us know in the comment below
