Investing in REITs

Investor Monkey - REIT Investing

When anyone talks about investing in property, most of us will be thinking of buying a property and sells it when the price the property can fetch is high. Some will be thinking of renting out the property and enjoy the passive income that it can bring. Known as Real Estate Investment Trusts (REITs) are special investment instruments, listed on stock exchanges around the world, where investors invests in companies that manages properties directly.

What is a REIT?

Being collective investment schemes, REITs invest in a portfolio of income generating real estate assets ranging from shopping malls, offices, hotels, service apartments and more. The assets of the REITs are managed by a REIT manager and revenues generated, usually from rental income, are distributed regularly to its investors. Typically investors of REITs have a goal of enjoying its income distribution and long term appreciation potential.

Structure of REITs

Structured as trusts, the assets of REITs are held by an independent trustee on behalf of its investors. The duties of the trustee, typically include ensuring compliance with all applicable laws and protecting certain rights of the investors, are laid out in the trust deed for the REIT.

Money raised from the investors through an Initial Public Offer (IPO) are used by the company to purchase a pool of real estate properties. The properties, managed by the trustee, are leased out to tenants and the income generated from the leasing of the property is then returned to the investors as income distributions or dividends.

REIT Structure
Typical structure of a REIT

Roles of REITs in Your Portfolio

In the United States, the life expectancy at birth in 2012 is about 78.74, rising steadily every year. With more years to rely on their retirement savings, many of the retirees are turning to increase their investment allocation to real estate, including REITs. With the requirement of passing at least 90% of their taxable income to the investors, REITs are seen as great income generating investments. On top of that, like stocks, REITs also provides opportunity for capital appreciation.

Statistic: United States: Life expectancy at birth from 2002 to 2012 (in years) | Statista

 

The Bottom Line

As more people are actively looking for means to beef up their retirement savings, many are turning to real estate investing, for rental yield or capital appreciation. However, investing in real estate may not be a viable solution to many who could not afford the instalments. REITs allows investors to invest in real estate like stocks. With the distribution of their partial taxable income, REITs provides investors a means to invest in real estates with a cheaper investment option.

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