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Jan 26

3 Types of REITs That Every Investor Should Know About

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REIT is short for real estate investment trust, and it is a company that owns, finances or operates a particular type of income-producing real estate. REITs are an investment opportunity similar to a mutual fund. They provide Americans from all walks of life, not those in just banks, hedge funds and Wall Street, with the opportunity to truly benefit from highly-valued real estate. They also give you access to a dividend-based income as well as total returns. Because of this, REITs help various communities to thrive and grow.

When investing in REITs, you can have several real estate assets in your portfolio through a mutual fund, individual exchange-traded fund or individual company stock. As a REIT stockholder, you can earn a share of the generated income without buying, financing, or managing property. Here are three types of REITs.


  1. Retail REITs 

About 24% of overall REIT investments are freestanding retail and shopping malls. This percentage represents the biggest investment in the US. A REIT probably owns that shopping mall or centre that you frequently visit. When considering investing in this type of real estate, you first need to examine the overall retail industry. It will help you assess whether this sector is currently financially healthy hence a good investment, and know future predictions. If it’s your first time looking into alternative investments, you want to work with a reputable firm that will guide you on 1031 exchange REIT.

Keep in mind that retail REITs generate money from the rent charged to tenants. Therefore, if these retailers are experiencing low sales, they may delay or default on the monthly payments. That is why it is crucial to intentionally invest in retail REITs that have the most substantial anchor tenants. Good examples of these are home improvement and grocery stores.


  1. Mortgage REITs

10% of all REIT investments are in the form of mortgages instead of actual real estate. This type of real estate investment trust is quite popular. Just because it invests in mortgages rather than equity, this doesn’t mean it’s free from risks. If there is an increase in interest rates, the mortgage REIT book values will decrease, resulting in lower stock prices. Additionally, mortgage REITs derive a substantial portion of their capital from unsecured and secured debt offerings.

Therefore, if the interest rates rise, future financing would become more expensive, reducing the loan portfolio value. In such a low-interest-rate setting, most mortgage REITs will end up trading at a discount on the net asset value.


  1. Office REITs 

The third type of REITs you can invest in are Office REITs, which are office buildings in reality. You’ll be receiving rental income from tenants occupying these officers. They usually sign long-term leases with the offices. When considering this type of REIT, there are some key questions that you ought to ask yourself before making deciding. Two of them are the rate of unemployment and the current economic state, and the vacancy rates.


Take away

Currently, diversifying your investment portfolio will be more beneficial for you than putting all your eggs in one basket. Real estate investment trusts are a great option, especially if you don’t want to be too involved. Talk to your financial advisor and gauge the available options.


Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.


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