A REIT is an investment company that works with multiple sector-specific assets, including self-storage facilities. Since REITs perform historically well, they are a profitable way to invest in storage. A company must meet a series of requirements to be considered a REIT, including:
- At least three-fourths of the company’s assets must be real estate properties of some kind.
- At least three-fourths of the company’s income must come from the real estate assets that it owns.
- At least 90% of the company’s taxable income must go to its shareholders.
The advantages of REITs include:
- High-yielding dividends: REITs can deliver significant income through dividend payouts, which tend to increase throughout the years and often grow faster than the inflation rate.
- Total returns: REITs can become more valuable as their underlying assets appreciate. You have the opportunity to achieve capital appreciation with a REIT.
- Profitable sell-offs: With publicly-traded REITs, you can buy and sell shares during a trading session when the REITs market value has increased. This option can give investors the potential for an additional source of income.
There are a few disadvantages to REITs, including:
- Market risk with real estate: REITs are traded and sold on the market stock exchange and are subject to price changes. An investor may receive less for their REITs than what they initially paid if their shares are sold in the public exchange. Additional causes of market risk include recession, interest rate changes or natural disasters. When any of these causes occur, the entire financial market is affected, making it difficult to eliminate portfolio diversification.
- Better as long-term investments: Sometimes, real estate devaluation and other factors can affect your REITs, but they earn income over the years. You can use them as a long-term investment strategy with a stockpile of disposable income to ensure that you generate a profit.
- Sensitive to changes in interest rates: REITs are susceptible to interest rate fluctuations, which can cause their value to change slightly. Holding onto your REIT shares for a longer period helps lessen the effects, but with the cyclical nature of interest rates, the changes still may affect your investment.