Many investors who want to own real estate without the hassle of actually owning the property outright often invest in real estate investment trusts. Known as REITs, these investments allow people to put money into real estate that produces an income. An REIT is a best described as a hassle-free way to own real estate without directly buying any property. Similar to stocks, investors can buy individual shares of a real estate investment trust that in turn gives them small pieces of multiple properties. This safeguards them from some of the risk associated with properties.
Types of REITs
The two most common types of real estate investment trust are equity REITs and mortgage REITs. Most equity REITs typically buy real estate that generates an income. The majority of income-producing properties include shopping centers, apartments, office spaces and renting single-family homes. If a real estate investment trust owns several property types, it is known as a diversified REIT.
Mortgage real estate investment trusts buy what are known as mortgage-backed securities. When investors, such as the managers of an REIT, buy a mortgage-backed security, they are buying a mortgage that secures an asset. The mortgages can come from agencies such as Fannie Mae or Freddie Mac, or the mortgages that secure residential and commercial property.
Buying and Selling REITs
Investors can buy or sell shares of a real estate investment trust just like individual stocks, making it a popular alternative. There are many publicly traded REITs available on the various stock exchanges throughout the world. Additionally, there are REIT mutual funds and REIT exchange-traded funds that give investors the option of purchasing shares. However, investors must use the services of a broker to buy or sell shares of a real estate investment trust.
Most investors consider REITs as a hassle-free way to invest in real estate without actually buying real estate. Savvy investors understand that real estate investment trusts provide them with both dividend-producing income and capital appreciation. Also, REITs typically offer higher yields than the broader markets. REITs are also a smart way to build a diversified investment portfolio that withstands market volatility and gives investors the potential for higher returns.
One of the biggest benefits of a REIT is its high-dividend payouts. According to some studies, REITs can produce close to 5 percent in dividend payouts while the S&P 500 pays out an average of 2 percent. However, REITs are very sensitive to fluctuations in interest rates, which exposes investors to inflation concerns and economic instability.