Investing in REITs, otherwise known as real estate investment trusts, isn’t all that different from navigating the country’s major stock markets. In fact, REITs are traded almost exactly like their stock counterparts on each of the major indices: Dow, S&P 500 and Nasdaq. That said, REITs are unique enough to warrant their own name, and even their own section on Wall Street. While REITs do share a lot of similarities with traditional stocks, there are a lot of differences that curious investors should pay special considerations to — that is, if they want to improve their bottom line. If you are interested in investing in REITs, it’s in your best interest to know what those differences are; only then will REIT investing become a valuable part of your portfolio.
In their simplest form, REITs represent an opportunity for anyone interested in investing in real estate to get the ball rolling. You see, REITs enable you to invest in real estate without actually owning a physical asset. Instead, you invest in companies that deal in real estate. More specifically, however, REITs are individual companies that own or finance income-producing properties, not excluding commercial real estate; investors can invest in each of these companies, not unlike a traditional stock. According to REIT.com, these particular investment vehicles are modeled after mutual funds, and “provide investors of all types regular income streams, diversification and long-term capital appreciation.”
“In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property,” says REIT.com. In other words, it is entirely possible to invest in commercial real estate without the added responsibility of becoming a landlord or even marketing for properties.
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REITs have become synonymous with the same benefits of real estate investing, but without the hassle. You see, it’s possible to invest in real estate through an REIT without actually owning a physical property. What’s more, REITs add in many of the advantages of publicly traded stocks. The unique combination of benefits has provided investors dividend-based income, competitive market performance, transparency, liquidity, inflation protection and portfolio diversification. What more could you ask for?
If you are interested in any or all of the following benefits, you may want to consider adding some REITs to your own portfolio:
I want to make it abundantly clear: you do not need a lot of money to invest in REITs. In fact, you can invest in REITs for as little as a few dollars, or however much a single share sets you back. Again, unlike physical real estate assets, REITs allow you to invest in part of a real estate company. That means you can invest as little as a single share costs. It is worth noting, however, that each REIT will come with a different price tag.
Take Apple Hospitality REIT Inc., for example; the hotel REIT trades for $17.83 per share at the time of this writing. In the last 52 weeks, Apple Hospitality’s price has fluctuated between $16.72 and $20.19. Therefore, it’s safe to assume you’ll pay that much for a single share of this particular REIT. Of course, you can certainly invest in as many shares as you want, so the amount you pay to invest in REITs is entirely up to you. There’s no reason you couldn’t buy 100 shares of an REIT you like, or even 1,000. How much you need to invest in REITs is entirely dependent on your strategy.
While physical real estate assets and REITs are intrinsically tied to each other, there are inherent differences. Investing in traditional real estate, for example, will have you invest capital in a physical asset; you literally spend money to own a piece of real estate in your name. As a result, you are directly responsible for the performance of the particular asset; good or bad as it may be. Real estate investment trusts, on the other hand, will have investors buy what are essentially the stocks of companies that own or finance income-producing properties. That’s an important distinction to make: When you buy an REIT, you are not taking control of a physical asset, but rather buying into a company that will do the heavy lifting.
In order to determine whether or not investing in REITs is right for you, it helps to weigh this particular exit strategy’s pros and cons. In doing so, you may be able to determine if you should invest in real estate through Wall Street or through acquiring physical assets in your name.
To be clear, as with any other investment, investing in REITs has both pros and cons. In fact, there isn’t an investment vehicle out there that doesn’t have some sort of negative connotation. It is up to you, however, to determine if the risk is worth the reward. First, let’s take a look at the bad:
And now for the good:
Investing in REITs has proven to be a sound investment strategy. Over the last quarter of a century, in fact, REITs have outperformed their traditional stock counterparts on Wall Street. What’s more, REITs offer a great entry point into the world of real estate investing for those are curious about what the industry has to offer. However, it’s not wise to simply jump in and start investing without knowing anything; you need to have a solid foundation. Hopefully this primer was enough to get you started.