Investing in real estate can be a significant commitment, especially if you are acquiring property through a traditional purchase. Additionally, factors such as buyer credit, funding sources, market competition, and available stock can make things more complicated. However, there are ways to try out the real estate market with fewer risks and obligations. One option, is to invest in a real estate investment trust, or REIT. Here is some information to help with understanding real estate investment trusts (REITs):
What is a Real Estate Investment Trust (REIT)?
Real Estate Investment Trusts or REITs allow someone to invest in properties without having physical possession. The properties themselves are owned by private companies and include structures such as apartment buildings, offices, commercial spaces, and hotels. When you invest in a REIT, you are investing in the company that owns the real estate.
Types of REITs
There are different types of REITs. For example, an equity REIT focuses on buying, selling, flipping, managing, and maintaining the property. These kinds of REITs can be focused on subsets of the market, such as commercial real estate. There are also mortgage REITs that are designed around investment in mortgages and lending. Hybrid REITs are a combination of both equity and mortgage REITs.
Pros of REITs
- Depending on the type of REIT you select, they can pay higher dividends, making them a potentially lucrative investment choice. When the market is steady, REITs can produce consistent returns.
- REITs are ordinarily bought, sold, and managed by experienced real estate professionals who understand market conditions and pricing. Someone looking to get into this type of investment does not have to be a real estate expert for their investment to be managed wisely.
- In some instances, REITs can be more liquid than traditional real estate investments. For example, selling publicly-traded shares in a REIT is typically easier than putting a property on the market and waiting for the real estate sales process to take place.
- Because you are pooling your money with other investors, you don’t have to supply as much capital upfront to invest in a REIT
- There is also typically less risk in a REIT than in a traditional real estate investment.
Cons of REITs
- REITs don’t allow the investors to have any control over decisions concerning what happens with the property and therefore the investment.
- REITs depend on the real estate market and tenant occupancy. If a property remains vacant, investors are not going to profit as much. If there is excess supply in the market, the price of property will go down, impacting how much rent a tenant is willing to pay.
- The volatility of the real estate market is always a risk for REIT investors. If the market takes a turn for the worst, it will have a significant impact on an investor’s bottom line.
Laura B. Bramnick is an experienced real estate attorney who can help you evaluate your real estate investment options. If you are seeking an exceptional, client-driven real estate lawyer in Scottsdale, Phoenix, Sedona, and throughout the State of Arizona, contact Laura B. Bramnick to schedule your consultation.