What’s a REIT?

In a day and age that has countless investments it really is hard what to determine where to put your money. Just thinking about where to put it can make some feel sick, that’s why many put their money in mutual funds.

So, What exactly are REITs?
Real Estate Investment Trusts (hereafter, REIT) are an exchange-traded security that is operated by a trust company. Similar to stocks you can buy REITs at anytime when the markets are open and sell the just the same through any broker.

REITs have Initial Public Offerings (IPOs) just like any other stock to raise money but instead of buying companies or assets to make their company grow, REITs buy real estate or interest in mortgages. It depends on the REIT as to what they are going to invest in, and they could own both properties and mortgages. REITs also have a special interest consideration and hence have a higher yield than most stocks.

Types of REITs
There are a variety of assets that REITs invest in. Because of their larger capital base, they can buy and operate hotels, shopping malls, condominiums, and other commercial buildings. Some REITs can be developers and buy land and build on the land that they acquire. While some REITs may have residential property in aims of generating income through capital gains and rental income.

Advantages of Owning a REIT
The diversity of REITs makes them attractive to investors because not many people can buy real estate on their own. But by owning a REIT they can take part in the profits that these companies generate. You also get to choose the REIT that fits your investment style and market that they participate in.

You get professional management taking care of real estate. Real Estate is considered one of the more risky investments but with professional management this risk can be limited to some extent. Furthermore, the dividends of REITs are often very attractive because they pay out a large part of their profits in the form of dividends. So you should expect a higher payout ratio (see Payout Ratio Article for details) but it shouldn’t be excessive to the point that they aren’t growing.

Mo2 Thinks
I’m a pretty big fan of REITs. Despite wanting to own real estate on my own, it gives me headaches having to think about crazy tenants that call every 4 hours about how their bathtub isn’t draining properly. REITs can act as a management company for you and fellow investors by taking care of your real estate and paying you distributions. Sure it’s not the same as owning real property by yourself but it takes away the hassle of the tenants, government, repairs, maintenance, etc. of each real estate you hope to own. The only thing you pretty much have to worry about is the well being of the REIT.

Obviously, owning your own property is much more glamorous. You can actually go up to the building and know it’s yours (minus the mortgage). But with a bit of experience in the real estate field has made me feel otherwise. I would much rather just sit here and write articles then argue with a tenant about the garage door that they broke.

I’m getting off topic here. REITs will make a nice addition to any portfolio of any size. Because of their high dividends REITs can probably be considered both fixed income and equity at the same time. This would depend on what the REIT is investing in. For example, if a REIT is speculative and buys land in Nunuvat (that’s in Canada for you clueless people) for the purpose of development sometime in the next 47 years, that’s scary. But if a REIT has commercial buildings in the major cities and has long-term leases with big name companies, I would think it would be an attractive investment. Obviously that shouldn’t be the only thing you look at.

Always do your homework and don’t buy anything (even a REIT!) just because some bozo at work bought it. It isn’t hard to see what these companies are doing and most of them have their own websites (they are public companies after all) telling you what the own and their vision. Try to see if it is overpriced or has reached its valuation and go from there. But like Warren Buffet says, the price of the stock shouldn’t matter, the company should. Happy investing!

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