What is equity REITs?
What’s an Equity REITs?
Investing in real estate can be dangerous and complicated. Rather than invest directly in real estate through buying actual property, some investors instead opt to put cash into REITs. REITs, or real estate investment trusts, are companies that own and operate income-producing property.
You can buy shares of an equity REIT or a home loan REIT, though equity REITs tend to be more popular amongst investors. Equity REITs are real estate companies that purchase commercial properties and let them out to be able to generate income. Equity REITs are a good choice for investors who want a bit of the commercial real estate action without actually having to venture out and buy property.
How equity REITs work
Purchasing shares of the equity REIT isn’t so very different from buying shares of the publicly traded company’s stock. Equity REITs acquire commercial properties that vary wildly from shopping centers to hotels to office complexes to flats. The goal in acquiring these properties is to generate earnings by collecting rent from tenants and businesses who lease the area. Some equity REITs are diversified in that they own various kinds of properties, while others are more specialized. An equity REIT may, for example, focus solely on hotels, while another might focus solely on departmental stores.
Once they’ve covered the expenses associated with running their qualities, equity REITs must pay at least 90% of the income they collect for their shareholders as dividends.
Equity REITs versus mortgage REITs
Mortgage REITs work much like equity REITs, but they invest in mortgages instead of bodily properties. Equity REITs profit by generating rental income from the actual properties they operate, while mortgage REITs profit by selling mortgages and earning income in the interest on the mortgages they own. Like equity REITs, mortgage REITs have to distribute at least 90% of their income to shareholders.
Both equity REITs and mortgage REITs might be listed on major stock exchanges, but they can also end up being traded privately. Of the two, equity REITs are far more prevalent, accounting for roughly 90% of the REIT market.
Benefits of purchasing equity REITS
One major benefit of investing in REITs is they tend to offer higher dividend yields than other investments. REITs are needed by the IRS to pay at least 90% of their own taxable income to shareholders; they’re not allowed to retain the majority of their profits to fuel their own growth. As such, their dividend payments are usually high. Another benefit of investing in REITs is that they provide a degree of diversification. Those who buy REITs can add property to their portfolios without assuming the risk and workload of purchasing actual property.
Drawbacks of investing in equity REITs
Though REITs often offer attractive yields, there are some risks inherent in purchasing them. Not all REITs trade on a public exchange, and those that don’t are regarded as a fairly illiquid investment. Investors who buy shares of non-publicly traded REITs run the danger of being unable to sell off their shares quickly once they need money. Furthermore, it can be difficult to gauge the worthiness of non-public REITs, as they don’t generally provide per-share estimates until 1 . 5 years after their offerings close. Additionally, many non-public REITs come along with hefty up-front fees. For these reasons, investors need to weigh all the benefits and drawbacks before investing in an equity REIT.
Guide to Equity REITs
Kinds of REITs
There are two primary types of REITs: Equity REITs as well as Mortgage REITs. The two types give investors the opportunity to purchase either the equity financing or the debt financing of property.
Equity REITs are real estate companies that acquire commercial properties – for example office buildings, shopping centers and apartment buildings – and lease the area in the structures to tenants, who pay rent. After paying the expenses related to operating their properties, Equity REITs pay out annually the majority of the income they collect to their shareholders as dividends. Equity REITs likewise incorporate capital appreciation from the sale of properties in the returns they pay. In the case of Timber REITs, their dividends include gains in the sale of timber. In all cases, this significant dividend distribution is made to approximate the investment return investors would receive if they possessed properties directly.
Mortgage REITs invest in real estate mortgages or even mortgage-backed securities, earning income from the interest on these opportunities, as well as from the sales of mortgages. Mortgage REITs, such as other businesses, earn their profit from the difference between the actual income they receive and their costs, including their funding costs to buy mortgage investments. They have the same requirement as Equity REITs to distribute the majority of their income to their shareholders annually.
Public Equity REITs and Mortgage REITs might be listed on major stock exchanges, or they may be non-listed. Both are registered using the Securities and Exchange Commission (SEC), but non-listed REITs can be purchased directly to investors by brokerage firms and are not exchanged on any exchange. Equity and Mortgage REITs also can end up being privately held.
New Real Estate Sector Underscores Value of Collateral REITs
Ask any investing expert and they’ll tell you that property is a foundational element of a well-rounded portfolio. Real estate investment trusts (REITs) have always been a staple among investors who prefer a passive approach, but some important changes are coming for these securities.
Over the next few weeks, equity REITs will be moving from the financials sector into their own separate real estate sector inside the indexes, which will also include real estate management and improvement companies. The move comes thanks to a shift in the actual Global Industry Classification Standard (GICS). This will function as the first new headline sector since the GICS was created within 1999. Once the transition is complete, both the Standard & Poor’s 500 index and also the MSCI EAFE index will have 11 sectors rather than 10. The equity REIT shake-up is placed to have some far-reaching effects on both investors and the actual financials sector.
Mounting interest in equity REITs fueling the alter
The reclassification of equity REITs is a testament to their growth during the last two decades. Since 2000, REITs have returned an average associated with 12 percent annually, leading high-yield bonds and large-cap stocks from 7. 9 percent and 4. 1 percent respectively. Further, the National Association of Investment Trusts (NAREIT) estimated the equity REIT market capitalization just over $1 trillion as of May 2016.
The move to produce an 11th sector designated solely for real estate and equity REITs particularly is justified in part by their increasing attractiveness to traders. The unique characteristics that set REITs and real estate apart from other investments are another significant the main equation.
The popularity of REIT ETFs, for instance, is attributed primarily to their lower costs in addition to their ability to generate consistent returns beyond those offered through other market indices. A July 2016 report from Lazard Global Property Securities put the year-to-date return for equity REITs at eighteen. 1 percent. The S&P 500, by comparison, showed a year-to-date come back of 7. 7 percent.
Looking ahead, equity REITs are likely to maintain a course of solid performance. The Urban Land Start is forecasting a 6. 7 percent average annual return with regard to equity REITs through 2018, evidence that this segment of the marketplace continues to come on strong.