A real estate investment trust (REIT) is a strategy in which investors can enjoy the benefits of investing in various assets and holdings without the management responsibilities. The REIT itself is generally a company that makes investments in real estate that produces regular income, such as office buildings, apartment complexes, and storage facilities. Although, REITs can also invest in other asset types such as data centers, healthcare facilities, hotels, and infrastructure.
REITs enable a wide range of investors to gain access to and buy shares of the properties owned by the REIT. As a result, investors can build and diversify their real estate portfolios.
Investors often use REITs to avoid the hands-on requirements of a property manager because they don’t need to buy and sell properties directly. If you’re new to this type of investment, learn how to invest in REITs for beginners and some tips for navigating this method.
A Background on REITs
Investing in REITs opens up many opportunities for investors that can help them meet their personal and financial goals. Before you start researching how much you should invest in a REIT, here is a summary of some things to think about before investing.
What Is a REIT?
In short, a REIT is a company that receives funding from a pool of investors and uses those funds to buy and operate income-generating real estate properties. Most REIT properties are rented out to generate rental income, which is distributed to investors as dividends. Depending on the REIT, investors may receive distributions monthly, quarterly, or annually.
The tenants of these properties could include individuals renting in an apartment complex or a business renting a commercial or industrial space for their company operations. The REIT will use the investors’ funds to manage the properties and handle repairs, renovations, trustees’ fees, and general upkeep and maintenance.
Why Were REITs Created?
In 1960, Congress created REITs to enable individual investors to invest in income-producing real estate on a larger scale. REITs allow investors to earn a share of the income produced by commercial real estate without buying the properties themselves. REITs help more investors enter the real estate investment sector by allowing them to gain exposure to different types of real estate they may not be able to purchase as an individual.
How to Invest in a REIT
Investors can choose from three different types of REITs:
- Publicly traded REITs
- Public non-listed REITs (PNLR)
- Private REITs
Depending on your needs and financial goals, any of these options may be ideal for your portfolio. Anyone can invest in a public REIT as they would with a stock, but they must use a broker service to navigate this investment. These broker services can be self-directed for publicly traded REITs, but they are required for acquiring any securities. You must also use a broker to access a PNLR offering. Both accredited and non-accredited investors can invest in a public REIT or PNLR. For a private REIT, investors must be accredited.
Investors can also invest in public non-listed REITs through an online real estate investment platform, such as 1031 Crowdfunding. With this platform, investors can benefit from ease of identification, due diligence, and access to necessary paperwork for investing in REITs.
Required Qualifications for REITs
To qualify as a REIT, companies and entities must meet specific criteria from the Internal Revenue Code (IRC):
- The REIT must have transferable shares.
- The REIT must be a trust, corporation, or association that would be taxable.
- The REIT must have a board of directors or trustees to manage the company.
- The REIT must pay at least 90% of its taxable income as dividends to its investors every year.
- The REIT must obtain at least 75% of its gross income from real estate sources, such as rent, interest from mortgages, or the sale of properties.
- The REIT must have a minimum of 100 shareholders after its first year and have no more than 50% of its shares held by five or fewer individuals.
Key Tips for Investing In REITs
How can you determine how much to start investing in REITs? Below are several tips and considerations to keep in mind as you navigate this new strategy.
What to Look for in a REIT
You’ll likely rely on any REIT you choose for a steady cash flow, so finding a REIT that maintains earnings growth is important. Some key factors you’ll need to weigh during your search are the type of asset, location, acquisition strategy, and reputation and experience of the manager.
REITs with increasing rents and high occupancy rates may also reflect a good management team that will upgrade the properties and increase demand, likely resulting in reliable passive income.
REIT Caveats and Considerations
As with any investment, there are potential benefits and drawbacks. Here are some cons you may experience when investing in a REIT:
- Varying liquidity: Some REITs, like PNLRs, are illiquid investments. This means investors may have difficulty selling their shares and liquidating their assets quickly because PNLRs are not bought and sold on public exchanges.
- Income suitability: While most investors can invest in public REITs without being accredited, some REITs require investors to meet a certain annual income or net worth threshold.
- Potential poor management of properties: Investing in REITs means that a REIT manager controls the investors’ funds, not the investors themselves. This means investors have minimal control over the management processes and must solely rely on the management team for day-to-day decisions.
- Tax implications: In many cases, dividends from REITs are taxed as regular income.
- Potential dividend suspension: In a worst-case scenario, an underperforming REIT may result in the suspension of dividends and redemptions.
- Limited transparency: Like liquidity, the transparency of the asset value in a REIT can vary depending on its classification. Public REITs are often more transparent than private REITs.
- Volatility: When investing in a publicly traded REIT, you may face the risk of higher volatility. Publicly traded REITs are more vulnerable to market fluctuations and investors can also trade these shares at any point.
REIT Future Trends
To stay agile in an ever-changing industry, REIT managers may employ new tactics to ensure the trust’s success. While many factors are pushing and pulling against the success of REITs, they can remain strong with diverse demand drivers and lower new construction activity that helps them stay defensive.
Using a forward-thinking strategy is key to a successful REIT, which means keeping up with changes in the rental industry. For example, many young people prefer living in cities rather than the suburbs. This trend has spurred a decline in suburban mall traffic while boosting urban shopping strips. REITs that spot these trends early can set themselves up for success.
Learn More About REITs With 1031 Crowdfunding
Whether you’re a brand-new or a seasoned real estate investor, you need to know your options. REITs may be ideal if you’re looking to generate passive income without having the hands-on responsibilities of property management. To help select the right REIT for you, 1031 Crowdfunding provides a platform to show you various REIT investment options. Our real estate investment platform makes selecting a REIT that meets your financial and personal goals an easy experience.
Our team has the knowledge and experience to help investors navigate new investments and make informed decisions. We’re here to support you along your REIT and alternative investment journey. Learn more about REITs on our blog, or register for an investor account today for more information about our offerings.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC