20 Surprising Facts About Real Estate Investment Trusts (REITs) You Should Know

Real estate investment trusts (REITs) offer a compelling opportunity for investors seeking passive income without the hassle of property ownership. By pooling funds from multiple investors, REITs invest in various real estate properties, generating income through rent and property appreciation. Here are 20 surprising facts about REITs that you should know:

REITs Make Real Estate Investing More Accessible

Investing in real estate and generating income through rentals can take much work and effort. REITs, however, allow investors to generate income easily. REITs enable investors to invest in a portfolio of large real estate properties like skyscrapers, malls, apartment complexes, etc., with ease comparable to stock investments. This form of investment can be a great option for investors who want to take part in real estate investment without having to dedicate too much time and effort.

REITs Offer Various Benefits

Many investors consider REIT investments because of the different benefits they offer. These include income opportunities for investors who can earn a passive income through their investments. REITs also offer investors the opportunity for global diversification across different global markets. Lastly, REITs can expose investors to the benefits of investing in specific sectors. These benefits have also led to an increase in popularity, enabling REITs to become a common investment option for many investors.

There is No Limit on REIT Property Investments

A REIT owns, operates, or finances income-generating properties, including apartment complexes, office buildings, healthcare facilities, hotels, or various infrastructures. However, they usually specialize in commercial properties that have more potential to generate an income. There is no limit on the kind of properties that REITs own.

REITs Are of Different Kinds

Based on the different kinds of properties invested in or owned, REITs can traditionally be divided into three major types- equity REITs, Mortgage REITs, and Hybrid REITs. The first enables the REITs to generate money through rent, the second enables REITs to generate money through net interest margins from the interest they earn through mortgage loans and the cost of funding these loans, and the last is a combination of the first two kinds of loans. As an investor, you can determine the various benefits of investing in these three loans and choose one that best suits your investing style.

You Can Invest in REITs Through Different Ways

Three major types of REITs are differentiated by their methods of generating funds and attracting investors. These include publicly traded REITs listed on a public exchange and bought or sold by individual investors, public non-traded REITs that do not operate on exchanges, and private REITs commonly only sold to institutional investors. You can determine the best investment style for you and choose a REIT to invest in accordingly.

Non-traded REITs are Illiquid

Non-traded REITs refer to REITs that are not traded on exchanges, making them less liquid than publicly traded REITs. They cannot be readily sold on the market but offer more stability because they are not subject to market volatility. Investors who want to invest in non-traded REITs can buy shares through brokers or financial advisors who participate in non-traded REITs. One of the main drawbacks of non-traded REITs is that you may be unable to sell them if you require money.

Difficult to Determine the Value of Non-traded REITs

Non-traded REITs lack transparency. While it is easy to find market prices of publicly traded REITs, the value of shares of non-traded REITs is not readily available and difficult to access. Usually, these kinds of REITs estimate their value per share up to 18 months after an offer closes, which can be a long time after you’ve made your investment. This can make it extremely difficult for you to assess the value of your investment, and you may have to stay unaware of its value for a long period.

Publicly Traded REITs are the Best Way to Get Started

Investors looking to get into REIT investing should begin with publicly traded REITs. These REITs generally do not require a large amount of money to invest, which can be an excellent option for investors unsure whether this is a suitable investment for them. However, you must conduct proper research to find the best REIT option that will help you meet your long-term goals.

Special Tax Considerations Must be Taken into Account in REIT investing

REITs generally pay out at least 100% of their taxable income to property shareholders, making them responsible for paying all kinds of taxes on the dividends and capital gains received through the investment. These dividends and gains are usually treated as ordinary income and can increase income tax rates. It is recommended that investors consult tax advisors before closing an investment deal on a REIT to understand the different tax considerations that must be considered.

REIT Funds Can Help in Diversification

As an investor, diversifying your investment portfolio is essential to minimize risks. In addition to regular real estate investments and REITs, you can also consider REIT mutual funds and ETFs to help you further diversify your portfolio. These funds can introduce you to a wide range of real estate sectors you can invest in through a single financial product, making it easy to increase diversification.

REITs are Legally Required to Distribute a Minimum of 90% of their Taxable Income

REITs are granted special status that enables them to avoid corporate taxes. However, one of the main requirements to avoid being taxed as a corporation is that REITs must distribute at least 90% of their taxable income to all shareholders. Another essential requirement is that the bulk of REIT assets and income must be generated from real estate, or they would not qualify for special status. The taxable income is generally distributed in the form of dividends to shareholders.

Some REITs Offer a Hedge Against Recession

While it may be difficult to accurately determine what kind of investments will perform well during periods of inflation or recession, some REITs act as a hedge against recession. These include REITs that invest in or own properties like healthcare facilities or retail properties, as these kinds of properties tend to have longer lease structures and, therefore, are less exposed to cyclical economic downturns than REITs that invest in hotel properties.

REIT Dividend Schedules Vary

The frequency of payments through dividends for REITs can vary from one company to another. Dividend schedules for REITs can vary from monthly payments to quarterly payments or even to annual payments. REITs follow no universal schedule when making payments to their shareholders. Notably, the frequency of dividend payments does not always indicate the higher returns that one REIT gets over another. While monthly-paying REITs are attractive to investors focused on receiving a steady flow of income, the fact that REITs do not follow a strict payment schedule must be noted.

REITs Have a Global Reach

REITs originated in the US. However, their popularity has enabled other countries to adopt similar real estate investment structures for residents. Some REITs even operate on an international scale, allowing investors to include foreign-invested REITs in their portfolios. However, a caveat to remember is that international REITs can operate on foreign markets and are, therefore, susceptible to a different set of rules and risks. Having all the information you require to make an informed decision before investing in foreign REITs is essential.

Choosing the Wrong Sector can Affect Your Investment

As detailed above, REITs typically invest in various real estate properties across different sectors. Choosing a REIT that invests in a sector that does not have the potential to perform well in the long run can severely impact your dividends and overall returns. Therefore, you must conduct your due diligence before deciding what kind of REIT you want to invest in, as the sector it focuses on can play a significant role in your profits.

Companies Must Meet Different Requirements to Qualify as an REIT

In addition to the factors discussed above that enable companies to qualify as REITs, they must also fulfill other conditions. These include investing at least 75% of total assets in real estate or cash, a board of directors or trustees must manage the company, not more than 50% of its shares must be held by five or fewer people, having a minimum of 100 shareholders after the first year of existence, etc. Companies need to fulfill these conditions to ensure that they can be treated as REITs and avoid the obligation of paying corporate taxes.

The Securities and Exchange Commission regulates REITs

The Securities and Exchange Commission generally regulates REITs, or SEC, in the US. This body ensures that REITs are operated under legal conditions and helps in improving transparency and investor protection. REITs often register with the SEC and operate in different kinds of markets.

Frauds Usually Exist with Private REITs

Because private REITs are not registered with the SEC and are not traded on securities exchanges, they open more opportunities for fraudulent activities. Con artists and fraudsters take advantage of the lack of a regulated market, which has led many investors to invest in a losing asset. Most private REITs are legitimate companies that provide good investment opportunities. However, the abundance of fraud in these markets makes investors cautious about investing in private REITs.

Some REITs are Sensitive to Economic Cycles

Like many other assets, some REITs are sensitive to the economic cycles where their performance reflects the current economic conditions. This can mean that the status of the economy can determine what kind of profits or returns you receive through your REIT investments. It is important to note that because REIT companies are spread across different sectors, the performance of your REIT can also be determined by the performance or growth of your REIT’s sector.

REITs can Contribute to Wealth Management

Many experienced investors and individuals with access to funds use REITs as part of their investment strategy to help with wealth management. The benefits that REITs offer and their ability to increase diversification have led many investors to invest in REITs only as a method of managing their portfolios. This highlights the range of opportunities they offer investors and why they appeal even to new investors who want to begin their investing journey through REITs.

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