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The Beginners Guide to REIT Investing

Are you looking for a way to invest in real estate, but you don’t have time to deal with tenants or maintain properties? Have you heard of real estate investment trusts, but you’re not sure if they are a suitable investment for your portfolio?

There are more than 225 REITs registered in the US that trade on a national stock exchange. If you are considering an investment in a REIT, there are a lot of companies to choose from.

Buying shares in a real estate investment trust can be a great strategy when it comes to your wealth management choices. Here’s a guide to help you learn more about REIT investing.

What Is a REIT?

A REIT is a real estate investment trust. That’s a company that invests mainly in real estate assets. Individual investors can buy shares in the company. This allows them easy access to the real estate market.

Most REITs trade on public stock exchanges, but some REITs trade privately. Publicly traded REITs have the advantage of being very liquid assets.

The primary purpose of a REIT is to generate income from real estate assets. This income comes from several different streams.

How to Invest in REITs?

Three different types of REITs trade on the public stock market and it’s easy to buy shares. Each type of REIT tends to focus on a different sector in the industry.

Equity REITs are the most common type. These companies buy and manage rental properties. They also earn income from rents and management fees.

Mortgage REITs (mREITs) invest in real estate mortgages, providing a source of financing for real estate investors. These companies earn income from mortgage interest.

Hybrid REITs are a combination of the two types. They hold rental properties and also invest in mortgages. This REIT blends the strategies of both types, making them a powerful investment holding.

There are two types of REITs that don’t trade on the stock exchange. They are public REITs registered with the SEC, and private REITs, which are not.

You can purchase shares in a REIT mutual fund, which is a professionally managed portfolio holding shares in different real estate investment companies. They aren’t traded on the stock market but can be purchased privately.

Another option is to hold shares in a REIT exchange-traded fund (ETF). These funds are like mutual funds but are traded on the stock exchange, so they’re a bit more liquid than mutual funds.

A wealth management company can provide you with more information on REIT investing. They will help you make an informed choice.

What Sectors Do REITs Include?

There are many types of REITs, and most of them specialize in one part of the industry. Different sectors can be more traditional, such as offices, residential apartments, and commercial or retail malls. 

Commercial REITs usually have net lease arrangements where the tenant is responsible for rent and other operating costs, including taxes and maintenance.

REITs also specialize in cell towers, warehouses, or data centers. Some companies hold assets in several different sectors, offering additional diversification within the REIT itself.

REIT Investing Provides Diversification

Diversification is the practice of spreading your investments over a wide range of sectors and industries to reduce your portfolio risk

Investing in highly correlated assets can increase your risk. Highly correlated assets are closely related, and they tend to perform the same way during market events.

When you invest in a single sector, banking, for example, you are subject to a higher level of risk when the market responds to world events that have a negative effect on that sector. 

Owning shares in a REIT improves diversification in your portfolio in several ways. 

  • The company holds a variety of different assets within the REIT itself.
  • Real estate investments have a low correlation to most other asset classes held in an investors’ portfolio.

Diversification reduces overall investment risk and smooths out the returns from your portfolio.

Rules For REITs

Real estate investment trusts were created in the US in 1960 to allow individuals to profit from commercial real estate without going out and buying the assets on their own.

In the US, provisions in the Internal Revenue Code established the rules. To qualify as a REIT, the company must hold 75 percent or more of its assets in real estate. Also, at least 75 percent of its gross income must come from real estate income such as rents or interest on mortgages.

The company must also payout at least 90 percent of its taxable income to investors as dividends each year. 

These requirements make real estate investment trusts a reliable way to receive a steady flow of income. They also have the potential of long-term capital appreciation as the assets grow in value.

Dividend Taxation 

Investors are responsible for paying income tax on the amounts they receive from the REIT. The IRS considers these payouts to be regular income, so they can’t be treated as dividend income.

How to Compare Different REITs?

When comparing different REITs, investors use funds from operations or FFO to evaluate the company’s operational performance.

FFO is important because it removes one-time transactions that inflate or reduce a company’s cash flows. One example is cash received from the sale of a property held within the REIT.

Investors use the following steps to calculate funds from operations:

  1. Calculate earnings for the period.
  2. Subtract depreciation and amortization.
  3. Add back losses on sales of assets.
  4. Subtract gains on sales of assets and interest income.

Most REITs will report funds from operations on a per-share basis. FFO per share is like EPS or earnings per share, which is an indicator used to evaluate other companies.

Get Wealth Management Assistance Today 

Now that you have more information about real estate investment trusts, you can understand why REIT investing is an affordable way to get into the real estate market. 

There are many factors to consider when you make investment decisions, and it’s always helpful to have a professional to assist you.

Contact Bogart Wealth today if you’re looking for wealth management services in McClean, VA, or Greater Houston, TX.

IMPORTANT DISCLOSURE INFORMATION:

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.comPlease Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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