Real estate investment trusts (REITs) are attractive investment vehicles that have always delivered excellent returns. REITs provide moderate risk, good portfolio diversification and great returns based on significant capital appreciation. Prospective investors with a long-term time horizon could benefit mighty by investing in real estate investment stocks. REITs are intriguing investments that should be an essential part of every well-diversified portfolio.
What Is REIT And How It Works?
A real estate investment trust (REIT) is a company that invests in real estate or loans secured by real estate. REITs have been around since 1960, but investors have started buying these high-yielding financial instruments in the past twenty years. As a result, the REIT industry has grown dramatically in size and importance. Generally, REITs are established by banks, insurance or mortgage companies, which give the individual investors the opportunity to buy any kind of real estate commercial property such as apartment buildings, hotels, and even skyscrapers. Besides issuing shares of stocks, underwriters raise capital by borrowing from banks and issuing bonds or mortgages. Therefore, most REITs are highly leveraged, with a typical debt ratio of 70%.
Types of REITs
There are two major types of REITs: equity and mortgage trusts. An equity trust is a public traded organization that buys, manages, maintains and sells properties. The attractiveness of equity REITsis hidden in the fact that they are tax-exempt on corporate level, as long as at least 90% of the income is annually distributed to shareholders in the form of dividends. However, shareholders are responsible for paying taxes on the distributions. A mortgage trust invests primarily in mortgage and construction loans. Mortgage REITs hold loans and other debt obligations that are secured by real estate collateral. Even though mortgage trusts may occasionally deliver spectacular returns, equity trusts are more preferable from investors, because they provide better long-term rate of return, greater liquidity, less market price volatility, and lower investment risk.
The Idea of Perfect Investment
REIT is an earning machine. When you buy a REIT, you are not just buying real estate, you are also buying a business, which gives you steady and predictable cash flow that property leases provide, and the benefit of common stock’s liquidity. Furthermore, REITs add versatility to your investment basket, because typically real estate is not only inflation hedged, but also does not correlate well with other asset classes. Consequently, REITs offer diversification to your investment portfolio. Another important characteristic that distinguish REITs from any other investment options is the stock’s volatility. Considering the market fluctuations that the stock market has experienced in the past few years, REITs are less volatile than other equities.
REITs play an important part in the global ongoing real estate business. Coming from the fact that real estate assets generate reliable and significant dividends, they should belong in the portfolio of every investor who is pursuing glamorous and secure financial future. For additional information on this and related topics, check out Roger Conrad’s free report on REIT Investing Secrets Revealed.