You may be interested in investing in real estate but aren’t sure where to start. You may not have the budget to invest in larger properties, but know they can provide income opportunities.
REITs allow individuals to invest in real estate designed to produce income. You can buy shares as you would stock in other industries. You have the potential to earn a share of the income the REIT produces without having to buy or finance your own properties.
What are REITS?
A REIT is a Real Estate Investment Trust. A company or trust may own, finance, or invest in real estate and real estate related assets. REITs allow you to invest in properties through portfolios, similar to how you’d invest in stocks.
REITs are a pass-through entity. REITs with at least 75% of their total assets and income in real estate can avoid federal income taxes at the corporate level.
Income from REITs includes:
- Net operating income from owning properties
- Interest received from mortgages and other real estate related loans
- Sales of real estate
How Do REITs Work?
REITs have to distribute at least 90% of their income to investors through dividends; they cannot retain their earnings. A REIT requires a minimum of 100 shareholders, and every REIT must have fewer than 5 individuals holding no more than 50% ownership.
There are two types of REITs:
Equity REITs
The REIT operates a variety of properties and mortgages in an attempt to generate income. They may own offices, hotels, apartments, or shopping centers. Income for these REITs mainly comes from the revenue generated by rent.
Mortgage REITs
This type generates income through loans like mortgages and other real estate debts, including mortgage-backed securities. Revenue comes from the earned interest on their investments.
A REIT can be private or public and either traded or non-traded. REITs can specialize in the type of property they invest in, like offices or apartments, or have diverse portfolios.
How to Buy Into a REIT
You can invest in a REIT by purchasing shares of a publicly traded REIT company. This includes stocks, mutual funds, and exchange-traded funds (ETFs). Over 145 million American households are invested in real estate through REITs.
Many Americans are invested in REITs through mutual funds and ETFs through their 401(k)s, IRAs, and pension plans.
You can also invest in private REITs and non-publicly traded REITs. You can use a REIT directory to find companies listed by sector, listing status, and stock performance.
REITs help make the potential benefits of real estate accessible to all individuals. You don’t need to be wealthy to start investing if you are a shareholder of a REIT.
If you’re interested in joining a REIT, find a property management company that offers diverse portfolios. Investing in a variety of property types and REITs can help you manage risk.