What is a REIT? What is a real estate investment trust? How do I invest in a real estate trust? Is a REIT kind of like a mutual fund for real estate or income generating properties?
A real estate investment trust (REIT) is a corporation that buys, owns, and manages real estate properties and/or real estate loans. In a sense, REITs operate somewhat like a stock broker, in that they offer shares to the public. Like a regular share in a business, a stock represents ownership but here the rights lie in real estate.
But unlike a stock broker, REITs have two unique functions: to manage groups of income-generating properties, and to distribute most of its profits as dividends.
In fact, the honey that attracts investors to REITs is the dividends that are regularly passed along to investors and the escape from any property management duties. If you’re looking for income, you should consider these stocks, in addition to bonds and other dividend paying stocks for added stability.
There are different types of Real Estate Investment Trusts (REITs):
• Equity REITs – These are the REITs that are most often discussed when you read about REITs. They buy, own, and manage specific types of properties, such as apartments or office buildings, but can diversify and even own properties such as golf courses.
• Mortgage REITs – Fewer than 10% of all REITs are classified as mortgage REITs. These are corporations that buy, own, and manage real estate loans and not the real estate itself. Instead, they serve as financing companies and earn their income through interest.
• Hybrid REITs - These REITs generate revenue through rent and capital gains, like an equity REIT, but also through interest like a mortgage REIT.
When selecting stocks, you might hear about top-down or bottom-up analysis. Top-down has an economic perspective and is based on themes. For example, an elderly population might favor drug companies. Here, REITs can be affected by anything that impacts the supply and demand of real estate.
Bottom-up looks at a company’s revenues, expenses (e.g. taxes and insurance, property maintenance), future growth, return on equity, financial statements, and other information to determine its value. In other words, a REIT’s value is calculated according to the adjusted funds from operations, or AFFO.
Try looking at a diversified REIT that owns a variety of property types, ranging from offices to apartment complexes to residences. Or think about buying into a mutual fund that owns and has substantial experience in REITs. The point is to vary your investments and spread them out a little.