If you are a millennial living in America, you probably know how overwhelming it is to think about buying property. You always wanted to have your dream home, but that milestone seems more and more distant with every passing year.
But what if you could still earn income from owning a property, without actually saving up for an entire house? There are many financial tools on the market that are tailored for the needs of different investors- and this might be the one for you.
Enter, RIETs, or real estate investment trusts. This type of investment allows you to earn dividends on your property without the hassles of managing a house, dealing with tenants, and worrying about maintenance. In this article, we will discuss how REITs work, who can invest in REITs, and also the benefits and pitfalls of this tool. Let’s dive right in!
What is a REIT?
A real estate investment trust is basically like mutual funds, but for real estate. It is a pool of funds that is collected from multiple investors, which is then used to invest in the purchase and management of different kinds of properties. These include residential apartments, office buildings, public centers, etc.
If you are one of the investors who is putting your money in that pool, you earn a steady income in the form of dividends. Basically, whatever revenue is generated by the property through rent, you get a share of that, depending on how much you have invested.
Types of RIET
There are different types of RIETs, based on how funds are channeled and what kind of returns the investors get. Here are a few types.
Equity RIETs
This one is the most basic, straightforward model of all. You invest some money in a RIET, the company uses that money to buy property. The tenants come, pay their rent, and you get your steady cashflow from this revenue.
Mortgage RIETs
Mortgage RIETs use the investor funds to loan money to people who want to buy and develop properties. The borrowers have to pay interest on the loan. Investors earn their returns from this interest money. It’s kind of like you’re teaming up with a bank that gives housing loans.
Hybrid RIETs
As the name suggests, hybrid RIETs are companies that are jack of all trades. They use investor funds for both buying property themselves, and giving loans to people who want to buy property. Returns come in the form of both, property revenue, and interest on loans. It certainly diversifies your portfolio compared to the other two types.
How to invest in a RIET?
There are many ways of investing in RIETs. In fact, they can also be categorized according to how investors access them. Here are the categories.
Publicly trade RIETs
These REITs are listed on a national stock exchange, and are traded just like equity shares. Individual investors can create their accounts on trading platforms, and can buy and sell RIETs on their own. These transactions are regulated by the US Securities Exchange Commission.
Public Non-traded RIETs
These RIETs are registered with the Security Exchange Commission, but you won’t find them on national security exchange platforms. So these shares are accessed through brokers and financial advisers. Unlike publicly traded RIETs, non-traded ones are less liquid.
They are harder to sell, because you can’t just sell it off to individual investors on public platforms. Instead, you might have to wait for the company to buy back the shares- and that could take a while, even several years.
Private RIETs
Private RIETs are neither listed on securities exchanges, nor registered with the SEC. They are offered to a select group of investors, depending on wealth and income criteria. They are often open to institutional investors only, i.e., those who manage investments on a professional level.
Advantages of RIETs
Good returns
Real estate prices are soaring. As a result, RIETs promise stable returns, if not extremely high returns. Through capital appreciation over time, you can steadily grow your wealth. It is definitely more manageable than buying and maintaining property by yourself.
Diversification
There are different types of RIETs you can invest in, including hybrid ones. It will be an important addition to your portfolio. Real estate is a strong form of investment. When other investments show a decline in returns, you can fall back on these- that way, you avoid putting all your eggs in one basket.
Risk adjusted investment
Historically, real estate has been considered to be a hedge against inflation. Property values and rental rates tend to increase with time, along with inflation. So when you find that your paycheck is not growing with your bills, you can rely on returns from RIETs to keep up with the inflation.
Transparency
This aspect applies only to publicly traded RIETs, since they are regulated by the SEC. The company has to report their financials to the regulatory bodies, and have to disclose crucial details about their investments. Investors also have more access to the financial performance data of the company.
Disadvantages of RIETs
High costs
Investing in an RIET can require you to pay high management fees, which might lessen your returns. Property acquisition, leasing, management, reporting, investor relations, etc. are quite an expensive affair. Investors are expected to pay for the cost of managing all these things, and these fees can sometimes get too high to handle.
Less tax benefits
The money you get from RIETs, unlike other investment returns, are not taxed in a separate format. They are taxed just like your ordinary income, and those bills can be higher than the taxes you usually have to pay for your investments.
If you are thinking of investing in an RIET, or just exploring your real estate investment options, we hope this article helped you understand how RIETs work. Once you do an assessment of your disposable income and appetite for risk, you will be well on your way to decide whether RIETs are the right option for you. Good luck!
