A REIT, or Real Estate Investment Trust, is made up of a group of individual and sometimes small investors. These people pool their resources in order to purchase properties together that these investors would not be able to buy alone. Often, REITs put their money into apartment complexes, commercial buildings, and shopping centers. REITs are not all alike, however. Choosing the one that is best for you might take some study and research.
Types of REITs
The three main types of REITs are the Equity REIT, the Mortgage REIT, and the Private REIT. Equity REITS are called by that name because that is what they are all about. Rather than purchasing land to resell, the Equity REITs buy income-producing properties such as office space or apartments with the intention of holding it, running it, and watching it grow in equity.
The Mortgage REIT also has a nearly self-explanatory name. An MREIT gets its income from the interest gained from property financed. Most of the property is usually residential.
Private REITs are owned by individual groups. They are subject to less regulation, and you have to decide whether this is an advantage to you or a disadvantage.
Real Estate Stocks
Most REITs are publicly traded, with the exception of private REITs. Equity REITs stock dividends are determined by the occupancy income the properties generate, as well as realized equity after sales. Mortgage REITs stock dividends are tied to the interest rates. Since these two types of REITs are publicly traded, it is simple to buy the number of shares you want, and sell them whenever you please.
Expense Ratios refer to the administration costs of the REIT. They are expressed as a percentage. You may want the lowest expense ratio possible. Yet, there may be circumstances in which you will settle for a significantly higher ratio.
Active vs. Passive Management
Actively managed REIT funds are constantly being researched and reevaluated. Sales and purchases are made as deemed appropriate throughout the year. A passively managed REIT will be managed according to an index and will not see much change throughout the year. The expense ratios vary the most when comparing REITs with active or passive management. Actively managed REITs require more work, so there is a need for higher administration costs. Passively managed REITs do not need as much attention, so the costs of running them are less.
Before you purchase a REIT share, take the time to find out whether there will be a redemption fee. Learn what the penalty would be if you sold the share early on, and how soon the REIT managers consider “early.”
When choosing a REIT, it pays to evaluate not only the type of REIT you are buying into, but also the nature of the individual trust you are considering. REITs provide a great way to make money and a hedge against inflation. By making the right choice, you can see even greater gains for your circumstances.