What is a Real Estate Investment Trust – REIT ?

August 6, 2020

What are Real Estate Investment Trusts (REITs)?

Like an Exchange Traded Fund (ETF), a REIT trades directly on an exchange, but its underlying assets are usually property related. REITS may also take the form of a mutual fund if the fund is focused on property only.

As the name suggests, a Real Estate Investment Trust will either invest directly in property or invest in the underlying mortgages.

What Does a REIT Invest In?

Key types of properties invested in include:

Commercial Property: Office Blocks, Event Venues, Shopping Malls, Hotels, and Warehouses.
Residential Property: Land and Apartment Blocks

How do REITS make Profits?

Property REITS seek to make profits from the renting out of the property and by the increase in the value of the underlying asset. For example, a REIT may own a building on Wall Street. They may rent that property to a number of Financial Institutions, thus earning a regular income from the asset, and also be able to realize any increase in the value of the property as profit also.

Mortgage REITS invest in the mortgages that provide the capital for others to buy the property. They supply the capital to fund the mortgages and earn the percentage interest paid on the mortgage for the duration of the agreement. They may also purchase Mortgage-backed securities.

Some REITS may combine both strategies; this is known as a hybrid REIT.

What are the Advantages of REIT Investments?

A key advantage of a REIT is that it has special tax benefits, and it offers the investor a method to profit from any increases in property value without having to invest in the property directly by taking out a mortgage and maintaining the property.

There are also REITs that pay monthly dividends allowing for faster compounding of your profits; this is a very nice advantage.