To some investors, one of the most appealing aspects of investing in real estate is the opportunity to earn truly passive income. While some people want to be actively engaged in their investment properties, others covet the potential to have their properties generate a passive form of income. However, it’s important to note that there are multiple types of passive real estate investments. Understanding what those options are and which one is right for you can help ensure that you’re making the appropriate choice with your money. One such example of a passive real estate investment tool is a REIT.
Real estate investment trusts, also referred to as REITs, were created on September 4, 1960, when President Dwight D. Eisenhower signed legislation that introduced commercial real estate investing options to regular Americans. Up to that point, only the super wealthy were capable of investing in commercial real estate. REITs combined the principles of stock market investing and real estate investing to help members of the working class potentially increase their own net worth.
A REIT is a company that operates, owns, or finances properties with the goal of generating income for investors. REITs pool capital from a number of investors and operate much like a mutual fund. This fractional investment structure allows investors to enjoy any profits generated by the property without having to be involved with the purchase, management, or maintenance of a property.
REITs allow investors to purchase shares in commercial real estate portfolios. These properties can include apartment complexes, hotels, data centers, shopping malls, healthcare facilities, cell phone towers, and much more. Essentially, any type of property that seeks to generate income and is part of a commercial real estate portfolio can be found in a REIT.
In order for a company to be considered a REIT, it must meet the following requirements:
Since most REITs are traded on public exchanges, REITs are incredibly easy to buy and sell. In terms of their performance, REITs strive to provide risk-adjusted returns and a steady flow of cash. In addition, the chance to add commercial real estate to a portfolio provides an additional diversification option. Most investors know that a diverse portfolio helps manage risk, as you are not totally reliant on a single asset class. Finally, and perhaps most importantly, dividends generated by commercial real estate are often higher than the dividends provided by other types of assets.
As is the case with any type of investment opportunity, there are also some disadvantages to REITs. The biggest disadvantage of publicly traded REITs is volatility, as they may behave like regular stocks. It’s also worth noting that some REITs charge high transaction and management fees, in addition to the fact that REIT dividends are generally taxed at a higher rate than regular income.
Investing in a REIT is a way to pursue a passive income while also diversifying your own investment portfolio. Depending on your personal goals and investment strategy, REITs can be a useful tool for your own financial future.