Real estate investment trusts, or REITs, are real estate companies that operate like stocks. Investors and real estate professionals buy shares in the company. A real estate investment trust is a company that invests in real property—typically commercial properties such as shopping malls, office buildings, hotels, etc.—and earns money through rents or lease payments from tenants.
These types of investments are prevalent because they provide investors with an opportunity to diversify their portfolios while earning steady income on their money. If you’re interested in investing in real estate but don’t want to deal with the hassle of doing it yourself, then you should consider REITs.
Advantages of Investing in REITs
There is a simple way for you to invest your money into real estate without buying individual properties or managing them yourself. Real estate investment trusts (REITs) allow you to pool your money with other investors and pay lower fees than if you were buying individual properties on your own. Companies like the Ayala Land REIT are examples of real estate investment trusts.
Below are the advantages of investing in REITs:
- Diversified real estate portfolio with lower risk: Since you are investing in multiple real estate properties, it is less likely that all of your money will be lost if one property goes under. However, the real estate market can be very risky.
- No need for extensive real estate knowledge: Since you are not buying real estate properties on your own, you don’t need to know as much about real estate for REIT investments to work out well for you. This means that more people will have an opportunity to invest and get good returns without having detailed real estate knowledge.
- Easy to access real estate investment opportunities: Since you can invest in REITs through your stock broker, these real estate investments are much easier for everyone to get started with because they require less research and information than buying individual real estate. This means that beginners and people who don’t have the time or ability to scout real estate opportunities can still join in and enjoy the potential returns.
- Tax benefits: Another benefit of investing in REITs is that you get to deduct part or all your investment from your yearly taxable income. This means that real estate investments are a great source for reducing tax, especially when you have large deductions because real estate is a real investment and not a capital asset.
- Long-term investments: Many real estate investors consider REITs as long-term investments because they can only be sold after 12 months from the time of purchase. However, since real estate properties are considered to have high volatility in price due to seasonality or economic climate changes, beginners invest in real estate with a time frame of at least three to five years.
- Low entry and exit costs compared to other forms of real estate investment: You don’t need a large amount of capital when buying shares on the real estate market because real estate investment trusts are required by law to set aside a substantial amount of earnings for distributions, which means that there is no initial fee on the purchase. Furthermore, selling real estate shares can be done easily through major brokerage firms and does not have fees beyond commission fees.
People Who Have Invested in REITs
People who have invested in real estate investment trusts have seen an average annual return of 12.00%. This means that real estate investment trusts have high returns than other investments in the real estate market.
However, despite the advantages of REITs, it is not something that will suit just about anyone. This is because real estate investment trusts can be risky. Therefore, you must understand your risk tolerance before investing in REITs and other forms of real estate investments. While real estate share prices tend to increase over time with inflation, real estate prices can also fall in real terms.
REITs are complex investments, and investors need to take great care when investing their money in real estate companies because REITs have many risk factors that they need to consider before making the investment decision. For instance, if you own real estate through REITs, your property taxes will increase and your tenants will be less likely to renew their leases.
In real estate investment trusts, the real estate is not directly owned by individuals. It’s jointly managed by a group of investors with specific expertise in real estate development and real property management. Just like other stocks, REITs are traded on stock exchanges where they can be bought and sold.