Nareit reports that about 50% of American households own real estate investment trusts (REITs). These are companies that own, operate, or finance income-producing properties. They're an easier way to get into real estate and ideal for seasoned investors looking to expand their portfolio.
If you're considering investing in REITs, it's vital to understand how they work and what makes them lucrative.
Here, we help you make smart real estate decisions by discussing REIT benefits. We'll also explore the different types so you can assess which one matches your needs.
Top Real Estate Investment Trusts (REITs) Benefits
Here are the most notable REIT benefits:
- Investment diversification
- Lower investment risk
- Steady income generation
- Higher liquidity compared to traditional real estate
- Lower entry costs
REIT diversifications allow you to spread your investments across various property types and locations. They reduce risks tied to one specific real estate market. If one sector underperforms, you can balance it out and enjoy steady REIT income generation.
Selling a property can be time-consuming since you may need to list it and compare offers before closing. However, you enjoy more liquidity with REITs since you can trade the real estate securities. You won't have to wait weeks to get your money back if you need funds urgently.
Investing directly into real estate may require a substantial amount of money to cover expenses such as:
- Down payments
- Renovations
- Property maintenance
Luckily, REITs are more affordable and accessible since you can start with even a few hundred dollars.
Types of REITs
The main types of REITs are equity, mortgage, and hybrid REITS. When you invest in equity REITs, you'll make money from rent collections or when the company sells a property.
Mortgage REITs, on the other hand, earn money by lending funds or buying mortgages and then collecting the interest. A hybrid REIT combines the investment strategy of equity and mortgage REITs.
It may invest in commercial real estate to collect rent or resell the properties. It may also put some funds in loans or mortgage-backed securities and pay you from the generated interest.
Factors to Consider When Choosing a Type of REIT
Each type of REIT has its pros and cons, so it's vital to consider the following factors before deciding:
- Investment goals
- Risk tolerance
- Market conditions
- Dividend yield
If you want steady income, consider mortgage REITs, but if you aim for growth, go with an equity REIT. The former will generate steady revenue, while the latter focuses on property appreciation.
Mortgage REITs are often more volatile because their profits depend on interest rates but usually have higher dividends. Equity REITs, on the other hand, are less risky because they rely on rental income but may have lower returns.
Explore Your Real Estate Investment Options
Real estate investment trusts (REITs) guarantee a relatively convenient way to diversify your portfolio. They help you earn a steady income, spread out risk, and enjoy liquidity. Before investing in these securities, assess your needs and learn about the options to make an informed decision.
PMI Navigate can help you work through the complexity of real estate investing. Our team has hands-on experience and extensive knowledge from being part of a franchise with over 20 years of operation. Contact us for trusted investment guidance.
