Real Estate Investment Trust: A Safer Investment Option
Real Estate Investment Trust or REIT's are corporate firms, which invest in real estate, eliminating all the corporate income tax. In 1960, RETI were created by US congress. They are required to distribute 90% of their income, which is taxable for investors. They can be both privately or publically held.
There are three kinds of REIT, Hybrid, Equity and Mortgage. Equity REITs are the ones which own and develop whole of real estate. REIT in these cases, do not take loans. The source of revenue for such properties is rental income. Mortgage REITs are the ones, where they manage just the loans made on real estate properties. The source of income for these corporations is just interest of mortgage. Hybrid REIT are a mix of both types, and own real estate as well loans.
Almost 96% of REITs invest this way. REIT provides similar benefits to people investing in real estate, as do mutual funds to stock investors. Though, REIT's exist in many markets around the world, US market is considered most evolved, as compared to others. They are required to invest, at least 75% in real estate. REITs invest in malls, hotels, shopping areas and other real estates. More commonly, REIT invest their own money in real estates around the world and then profit from rental income by investors.
If you wish to invest in the real estate market through REIT, look for three numbers,
- NAV (Net Asset Value),
- AFFO (Adjusted Funds From Operations) and
- CAD (Cash Available for Distribution)
Primarily, you can own a part of real estate without funding whole property. REIT's allow individual investors to invest in real estate, and earn regular dividends. In addition, they also earn money when the properties owned by REIT see capital appreciations. Since, these REIT's have to distribute 90% of their profits, they are known as High Yield Instruments.
If you will like to analyze the performance of various REIT's, you just have to look for REIT Tools. There are many tools available on internet, which can help you shortlist best REIT in market. Concept of REIT is not limited to USA and is well established in Canada, Japan and many other countries. Countries like India are also opening their markets to REITs now.
REITs have outperformed stock markets in recent years. Only risk that you may face by investing in an REIT is loss of dividends in case the performance goes down. Risk for a large cap REIT is far lower then the smaller cap REIT's. A REIT with less then USD 250 million in assets is called a Micro Cap REIT. One with assts up to USD 2 billion is called Smaller Cap REIT.
Investing in REIT will save you the hassles for finding a real estate, buying it, managing it and then selling it for profits. All you have to do is pick up the right REIT to invest in. If you look at size of assets and past track record, you can easily pick up good REIT to invest and profit form it.