What categories of REIT are there?

What categories of REIT are there?


REIT Basic principles – REIT Fundamentals

A investment trust, or REIT, is a company that pools the money of numerous investors to purchase and, in most cases, operate income-producing property.

The stockholders of a REIT are purchasing equity in the actual REIT and, in turn, earning a pro-rata share of the potential economic benefits that may be derived through commercial real estate ownership.

REIT investors get most of the potential advantages of property ownership, but leave the hassles associated with identifying, acquiring and managing those assets to the REIT recruit.

For investors, including a REIT allocation in their portfolio may offer key advantages for example:

  • Capital preservation
  • Attractive risk-adjusted returns
  • Stable cash flows
  • Expert management
  • Diversification
  • Potential inflation hedge
    REIT investments do not assure a profit or ensure against a loss.

Types of REITs

To qualify like a REIT, a company must comply with a number of needs, including having most of its assets and income tied to property investments and distributing at least 90 percent of its taxable income to shareholders annually as distributions.
Equity REIT

Equity REITs are the most common kind of REIT and purchase, own and manage income-producing real estate qualities. Equity REITs may be beneficial for long-term investors because, along with potentially earning dividends from rental income, investors also receive any capital gains in the sale of properties.

REIT

Mortgage REIT

Mortgage REITs lend money straight to real estate owners and their operators, or indirectly through purchase of loans or mortgage-backed securities. They do not invest within properties, but generate revenue through the interest paid on their home loans.

Hybrid REIT

Hybrid REITs are a combination of equity as well as mortgage REITs.

A further REIT classification is based on how shares of the REIT can be bought and held. REITs can either be publicly traded, public non-traded or even private.

Publicly Traded REITs

Traded REITs have shares listed on a national securities exchange (like the New York Stock Exchange [NYSE]). They are registered with and regulated through the U. S. Securities and Exchange Commission (SEC) and necessary to file certain reports with the SEC pursuant to federal investments laws, including quarterly and annual reports. Traded REITs are much more liquid than non-traded REITs; however, they are subject to exactly the same market fluctuations and volatility as other exchange-traded stocks.

Public Non-Traded REITs

Non-traded REITs will also be registered with and regulated by the SEC and required to file certain reports using the SEC pursuant to federal securities laws, including quarterly and yearly reports. However, non-traded REITs are not listed on any open public securities exchange, making them less liquid than their traded REIT counterparts. Non-traded REITs are generally considered more stable and less volatile than traded REITs since they’re not subject to the same stock market fluctuations as exchanged REITs. However, non-traded REIT investors generally do not have a chance to realize any gain on the sale of their shares before REIT completes its cycle of fundraising, operation and liquidation. Furthermore, the price per share received by an investor upon liquidation might not necessarily reflect the value of the company. Investors must meet minimum eligibility requirements to purchase non-traded REITs.

Private REITs

Private REITs are not registered using the SEC or traded on a securities exchange and are susceptible to less regulation, with the exception of guidelines associated with being approved and maintaining REIT status.

4 Types of REITs for Traders

When the stock market looks scary and bonds are stingy, many investors looking for something different come across investment trusts. But then the options can be confusing.

Some REITs focus on shopping centers, others in timberland, self-storage units or apartment structures.

If you’re already scratching your head, don’t feel bad. REITs occupy a distinct segment of their own, and can seem strange to investors who’ve lived within the mainstream world of stock and bond mutual funds. But these property investments can be appealing, even if you are happy together with your other holdings. They can pay generous dividends and they are usually “uncorrelated” with the stock market, meaning that if your shares are down, your REITs may be up.

That’s because the actual values of apartment buildings, office complexes, malls and strip malls march to their own tune, which can be quite not the same as that driving stocks and bonds.

REITs are like mutual funds that own property rather than companies. The REIT firm uses investors’ funds to buy structures or land, passes at least 90 percent of rental income to shareholders through dividends, and hopes to profit on rising real estate values over the long run.

It’s a way for ordinary investors to play the housing market without owning properties themselves, and to rely on pros to complete the hard work of purchasing, finding tenants and dealing along with upkeep, taxes and governmental regulations.

A single REIT may own a large number of properties, something you couldn’t possibly do on your own.

“With REITs, the investor gets a lot of diversification, ” says Robert R. Johnson, president and CEO from the American College of Financial Services in Bryn Mawr, Pennsylvania. “And unlike direct property investments, REITs are very liquid investments – that is, they may be bought and sold in a short period of time in a market-determined price. ”

REITs can also offer built-in inflation safety, since property values tend to rise as inflation does, states Eric Meermann, certified financial planner with Palisades Hudson Financial Team in Scarsdale, New York.

The National Association of Real Property Investment Trusts, a trade group, lists 18 categories and sub-categories associated with REITs, including some pretty small niches like timberland, infrastructure holdings, data centers and people self-storage units. Sixteen categories own actual real estate, while two purchase mortgages.

Johnson suggests an ordinary investor consider keeping 10 percent of the portfolio in REITs, and he believes now is a good time to purchase equity REITs – the kind that own properties – because historically REITs have performed well when rates of interest were rising, as many experts expect over the next couple of years. Mortgage-owning REITs tend to do poorly when rates go upward, since investors shun older mortgage securities with stingy interest income, he says.

Scott Crowe, chief investment strategist for CenterSquare Expense Management of Plymouth Meeting, Pennsylvania, says that although the Federal Reserve will probably raise short-term interest rates, long-term ones will remain low. Which should make it inexpensive to fund real estate purchases, propelling costs upward.

“On a global basis, we currently prefer the Ough. S., where we see the strongest fundamentals and attractive values, ” he says. Currently, his firm favors real estate investments in properties which will benefit from growing e-commerce, such as distribution warehouses and information centers. The same forces, however, could be damaging to traditional retail properties for example malls, so his firm favors retail centers anchored by supermarkets, which are likely to be immune from e-commerce competition.

Presently, a number of REIT categories pay dividends exceeding 3 or even 4 percent, in some cases even more, according to NAREIT. That’s pretty generous when compared with Treasury bonds or many dividend-paying mutual funds, but it does include risks.

Last year, total REIT returns – dividends plus reveal price changes – wandered the lot, from gains of more than 40 percent for REITs that own self-storage units to a loss in excess of 24 percent for ones specializing in lodging and resorts. The typical REIT returned 2. 83 percent.

What’s the downside? Unfortunately, REIT dividends are usually taxed at ordinary income tax rates, which for many investors are greater than the 15 percent rate on stock dividends.

“Despite the advantages of REIT exposure, a major drawback of REITs is that they’re highly tax inefficient, ” Meermann says. “Therefore, whenever possible, place your REITs in tax-deferred accounts for example an IRA or 401(k), or a tax-free Roth IRA. inch

REITS can also be volatile, he says, noting that the good and the bad can be dampened by investing in a mutual fund that spreads the risk by owning numerous REITs. While there are some REIT-owning index funds, he favors actively managed funds, believing the REIT market is not protected very thoroughly by analysts, allowing managers to spot bargains.

One of the most prominent REIT categories:

Industrial.This includes anything from warehouses in order to distribution centers to manufacturing space.

Office. These own office structures, renting space to tenants. They typically specialize in cities or even suburbs, or in buildings with certain types of tenants.

Retail. Retail REITs typically specialize in one of three major sub-categories: malls, regional malls or freestanding stores.

Residential. REITs in this class typically specialize, owning apartment buildings, manufactured homes or single-family houses.

While some REIT investors make short-term bets, financial advisors usually caution against speculating on temporary price swings, in part because two REITs within the same category may behave differently because their properties are in various markets.

 

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