Real estate investors are often looking for ways to further diversify their portfolios. In the same way that investors who focus on publicly traded stocks don’t solely focus on one type of asset class, real estate investors often like to hold investments in varying types of real estate.
In addition to choosing between different types of real estate, many investors also like to find ways to pursue truly passive income. While purchasing, improving, managing, and liquidating properties can be profitable, it’s also incredibly time consuming. Fortunately, real estate investment trusts, also referred to as REITs, provide investors with the opportunity to not only invest in different types of real estate, but to do so in a completely passive manner.
What Is a REIT?
A REIT is headed up by an individual or company (usually a company) who oversees the purchase, improvement, management, and eventual liquidation of numerous properties.
REITs were established back in 1960, when Congress made it legal for investors to purchase shares in commercial real estate portfolios. Up until then, only accredited investors were eligible to take part in these investment opportunities, and even then they had to go through large, well-established financial intermediaries.
In most cases, REITs specialize in one particular property type. For instance, if you want to invest in office spaces, you will need to find a REIT that specializes in that type of property. If residential property is your chosen field, you can find REITs that specialize in residential properties.
Once you’ve chosen your REIT of choice, you purchase shares in the same way that you would purchase shares in a stock . Based on the amount of money that you invest, you could receive dividends in the same way that you would in virtually any other type of investment.
What Does a Residential REIT Look Like?
There are multiple types of residential REITs, but at their core, they all operate the same way. Within the REITs that purchase properties, there are often sub-specialties. For instance, some REITs specialize in purchasing single-family homes, while others purchase apartment complexes or student housing, if they are investing in an area near a college.
Investing in these options is relatively straight forward. As an investor, you find a publicly-traded residential REIT that you’re comfortable investing in. You then determine how many shares you want to purchase and make your investment. In some cases, there may be a minimum number of shares that investors have to purchase, so you’ll want to check on that as well. Once you’ve invested, you will receive a portion of any dividends generated by the trust when they distribute their dividends among investors, as well as potential capital/price appreciation of a REIT.
Residential REITs are an evergreen option for investment property, as there are always people looking for housing. Choosing a suitable REIT for your portfolio is largely contingent on your current resources, investment strategy, and financial goals. Pursuing these truly passive income opportunities can be a tool to help build your own net worth while diversifying your portfolio.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.