Real Estate Investment Trusts (REITs) have a singular purpose. Specifically, they allow you, the investor, to invest in real estate without having to buy or finance your own properties. In fact, they were created for that very purpose; in 1960, Pres. Dwight D Eisenhower signed legislation that created REITs, thus opening real estate investment to regular Americans.
Since the 1960s, REITs have grown to encompass a variety of real estate sectors and types. Along with this, different REITs have come into play, with different methods of investment. It’s important to understand the differences between these REITs, so you can better determine how they fit into your investment strategy.
Different Investment Paths
These days, there is a plethora of REITs in which to invest. According to the National Association of REITs (NAREIT), there are three groups of REITs, all with different investment parameters.
Public REITs
Public REITs are those that are traded on public exchanges, such as the NYSE or NASDAQ. Anyone with enough money can buy shares in these REITs, and can sell them quickly. All that is required is an online account, or access to a stockbroker. The cost of investment varies, based on portfolio, REIT size, and other factors. Public REITs include equity and mortgage investments.
- Equity REITs buy, hold, and sell income-producing asset portfolios. These real estate companies own properties leased to tenants, and distribute most of their income to shareholders in the form of dividends.
- Mortgage REITs, or mREITs, purchase mortgages and mortgage-backed securities; income is generated from the interest on these investments.
The benefit of public REITs is that they are easy to invest in and are relatively easy to dispose of if you need cash. The downside is their volatility. Because they are traded on public markets, their movement might be correlated to issues unrelated to their actual performance.
Public Non-Listed REITs
These REITs (PNLRs) are similar to publicly-traded REITs in that they are registered with the Securities and Exchange Commission. However, PNLRs don’t trade on national stock exchanges. Rather, they are available through broker-dealers or directly from the REITs management company. PNLRs may also have a higher investment minimum.
Unlike their publicly traded counterparts, PNLRs can offer a higher rate of return and may be less volatile. But liquidity options may be limited to share repurchase programs or secondary marketplace transactions. PNLRs can also have more stringent holding periods.
Private REITs
Private REITs consist of funds or companies that are exempt from SEC registration. Shares don’t trade on national stock exchanges and are only available through broker-dealers. Additionally, these REITs are available only to institutional investors and/or accredited investors. Accredited investors are defined as entities with a net worth of at least $1 million or with income exceeding $200,000 over the previous two years.
While volatility can be low with these types of investments, private REIT shares are generally illiquid, making disposal difficult if cash is needed. Additionally, the minimum initial investment can be higher than that required for publicly-traded REITs.
The Right REIT for You?
The main takeaway here is that REITs can provide a real estate investment opportunity without the potential headaches of direct ownership. However, there are many ways in which you can invest in one of these trusts. Deciding on which REIT might be best requires a careful analysis of your investment strategy, net worth, and risk appetite.
