How to Invest in Property
Determine if REITs are right for you., Learn about the different types of REITs., Assess the risks of buying REITs., Purchase shares of REITs.
Step-by-Step Guide
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Step 1: Determine if REITs are right for you.
A real estate investment trust (REIT) is essentially a share of stock in a real estate venture, which is similar to a mutual fund.
REITs serve to pool the money of investors for the purpose buying, selling, developing and managing real estate properties.
By law, these trusts are required to have more than 100 investors, meaning that investors can input a only a small amount but be invested in an expensive property.This means that if you want to invest in real estate without the risk or initial investment of more traditional forms of property investment, an REIT is your best option.
Small and large investors may have a share in an REIT.
In addition, this provides you with low "liquidity risk," meaning that you can easily sell off your shares if you need to.
The REIT manager is required to pay 90 percent of trust income directly to trust shareholders as dividends, making REITs very attractive to investors seeking consistent income from investments.
High dividend yields are typically offered to investors.
Real estate investment trusts allow for investment in commercial property as well as residential. -
Step 2: Learn about the different types of REITs.
REITs can be classified in different ways, usually by the assets or geographical areas that they invest in.
Before purchasing an REIT, you should research the investments that it is involved in and consider the future performance of these markets.
While there are many types of REITs, they can generally be classified in the following ways:
By investment type.
First, equity REITs invest in large real estate properties and distribute earned rent or profits to investors.
Next, mortgage REITs invest in mortgages by loaning out money or by buying existing mortgages or mortgage-backed securities.
These funds are more sensitive to interest rate changes than other types.
This is because the income you may earn from these investments is based on the net interest margin.
Finally, hybrid REITs invest in both mortgages and properties.
By geographical area.
REITs were invented in the United States but have since become more common in the rest of the World.
Some REITs in the US focus on particular states or regions, and others focus on international properties and investments.
By property type.
Some equity REITs invest only in certain types of properties.
These can anything from rental condos to shopping malls., As with any investment, there are certain risk involved with purchasing REITs.
First, there is always the risk of REIT default, in which the fund providing your dividend payments fails and leaves you with a sunk investment and no dividend payouts.
However, there are other risk associated with non-exchange traded REITs.
These securities, which are traded outside of major stock exchanges, may be illiquid, lack price transparency, or be managed with conflicts of interest.
All of these can potentially lower your returns.In addition, there are REITs that are not registered with the Securities and Exchange Commission (SEC).
To check if a REIT is registered, you can search the SEC's EDGAR system at http://www.sec.gov/edgar/searchedgar/companysearch.html.Keep in mind that if an REIT is not registered, then that does not mean it is fraudulent.
That REIT may be private or simply not listed on the exchange.
In these cases, do your research before investing. , REITs, like any other security, can be bought and sold on public exchanges.
However, shares of REITs are also bought up by mutual funds and traded as part of Exchange Traded Funds (ETFs).
All of these investment vehicles can be bought and traded by contacting your stockbroker or investment professional, or by using an online trading platform.ETFs may help to minimize the risks because the expense ratios needed to operate the funds are typically lower.
They also typically yield above average returns.
While REIT's can provide a consistent income flow, they are the only option on this list that cannot be purchased using leverage (investing using loaned money).
This limits your potential return somewhat.
However, it also reduces risk.Another possible way to increase your return is by investing in a Dividend Reinvestment Plan (DRIP).
These plans are offered by some REITs and the dividends compound over time when they are reinvested.
Mortgage REITs are also lower risk than commercial lenders because they use a higher equity to debt ratio to fund themselves. -
Step 3: Assess the risks of buying REITs.
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Step 4: Purchase shares of REITs.
Detailed Guide
A real estate investment trust (REIT) is essentially a share of stock in a real estate venture, which is similar to a mutual fund.
REITs serve to pool the money of investors for the purpose buying, selling, developing and managing real estate properties.
By law, these trusts are required to have more than 100 investors, meaning that investors can input a only a small amount but be invested in an expensive property.This means that if you want to invest in real estate without the risk or initial investment of more traditional forms of property investment, an REIT is your best option.
Small and large investors may have a share in an REIT.
In addition, this provides you with low "liquidity risk," meaning that you can easily sell off your shares if you need to.
The REIT manager is required to pay 90 percent of trust income directly to trust shareholders as dividends, making REITs very attractive to investors seeking consistent income from investments.
High dividend yields are typically offered to investors.
Real estate investment trusts allow for investment in commercial property as well as residential.
REITs can be classified in different ways, usually by the assets or geographical areas that they invest in.
Before purchasing an REIT, you should research the investments that it is involved in and consider the future performance of these markets.
While there are many types of REITs, they can generally be classified in the following ways:
By investment type.
First, equity REITs invest in large real estate properties and distribute earned rent or profits to investors.
Next, mortgage REITs invest in mortgages by loaning out money or by buying existing mortgages or mortgage-backed securities.
These funds are more sensitive to interest rate changes than other types.
This is because the income you may earn from these investments is based on the net interest margin.
Finally, hybrid REITs invest in both mortgages and properties.
By geographical area.
REITs were invented in the United States but have since become more common in the rest of the World.
Some REITs in the US focus on particular states or regions, and others focus on international properties and investments.
By property type.
Some equity REITs invest only in certain types of properties.
These can anything from rental condos to shopping malls., As with any investment, there are certain risk involved with purchasing REITs.
First, there is always the risk of REIT default, in which the fund providing your dividend payments fails and leaves you with a sunk investment and no dividend payouts.
However, there are other risk associated with non-exchange traded REITs.
These securities, which are traded outside of major stock exchanges, may be illiquid, lack price transparency, or be managed with conflicts of interest.
All of these can potentially lower your returns.In addition, there are REITs that are not registered with the Securities and Exchange Commission (SEC).
To check if a REIT is registered, you can search the SEC's EDGAR system at http://www.sec.gov/edgar/searchedgar/companysearch.html.Keep in mind that if an REIT is not registered, then that does not mean it is fraudulent.
That REIT may be private or simply not listed on the exchange.
In these cases, do your research before investing. , REITs, like any other security, can be bought and sold on public exchanges.
However, shares of REITs are also bought up by mutual funds and traded as part of Exchange Traded Funds (ETFs).
All of these investment vehicles can be bought and traded by contacting your stockbroker or investment professional, or by using an online trading platform.ETFs may help to minimize the risks because the expense ratios needed to operate the funds are typically lower.
They also typically yield above average returns.
While REIT's can provide a consistent income flow, they are the only option on this list that cannot be purchased using leverage (investing using loaned money).
This limits your potential return somewhat.
However, it also reduces risk.Another possible way to increase your return is by investing in a Dividend Reinvestment Plan (DRIP).
These plans are offered by some REITs and the dividends compound over time when they are reinvested.
Mortgage REITs are also lower risk than commercial lenders because they use a higher equity to debt ratio to fund themselves.
About the Author
Daniel Brown
Creates helpful guides on crafts to inspire and educate readers.
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