REIT – Real Estate Investment Funds – Explained
Investing in real estate assets is appealing to many investors, though not everyone can raise a sufficient amount that will enable them to invest in a real estate property. In addition, direct investment in real estate requires attention, time and resources such as maintenance, tenant care and collecting rent and debt.
Real estate assets have many advantages – it is a source of recurring revenue stream, usually secure and continuous (when compared with income from other investment channels), it does not require additional investment in development but only in maintenance, and more important -a real estate investment reduces the risk in the overall investment portfolio – Real estate prices are not exposed to the same risks as stocks or bonds and there is not always a correlation between real estate prices and other parameters. Therefore, for example, housing prices do not always go down because of stock market volatility, thus reducing the overall risk of your portfolio. In addition, to a certain extent, investment in real estate grants immunity against inflation – the lease usually allows the monthly price to be raised or linked to one index or another.
Despite all the advantages, not everyone is able or can invest directly in a real estate property. The solution for this is the REIT funds.
REIT – Real Estate Investment Trust is an interesting and effective solution for people who want to invest in real estate without “getting their hands dirty” – buying property and dealing with tenants.
How does REIT work?
REITs are publicly traded companies established in the United States in the early 1960s to provide investors with an opportunity to enter the real estate market, allowing investors to pool their investment funds in a fund specializing in real estate investments. The investors buy units, just like a mutual fund, and enjoy the profitability of the fund’s activity. REIT funds invest their money in income-producing real estate assets – office buildings, commercial centers, multifamily complexes, industrial buildings, hospitals, etc. The funds manage the properties and collect the rent from tenants.
REITs enjoy tax exemptions on their operations provided they distribute most of their income as a dividend to their investors. This is the main difference between a mutual fund or investing in shares and REIT funds – the income from the fund’s activity is returned to investors as a dividend rather than as a capital gain. In this sense, REIT funds are more similar to bonds.
Buying units in a REIT fund provides the investor with an opportunity to join a diverse range of real estate activities – in the local market or in a number of international markets – from buying a mall in Poland to purchasing buildings for rent in Florida – activities that cannot be accomplished as a single investor.
REIT funds have several advantages that investors may be interested in:
- Reducing risk in the portfolio – the purchase of units in the REIT fund enables diversifying the investment in addition to shares, commodities and bonds. The fact that real estate is not always correlated to other investment channels reduces the risk of falling simultaneously both in real estate and in shares, for example.
- Specialized, long-term REIT funds invest in diverse real estate assets in specific markets and usually develop specialization and efficiency in utilizing resources and familiarity with the market, throughout the life of the asset, and invests in improving data and increasing profitability from the existing asset basket.
- Providing an opportunity for real estate investors to invest in a variety of assets. Joining the REIT fund enables diversification of real estate investments between different markets and assets, thus spreading the risk rather than linking to a single physical asset in a single market.
Types of REIT funds
- Equity REIT – Most of the funds are funds that are actual owners of real yielding assets and are engaged in managing them. 90% of the profits return to investors in the form of a dividend.
- Mortgage REIT – These are funds that specialize in managing mortgages of assets. The funds lend money to real estate owners through mortgages or other means of financing. These funds are based on interest income on loans, which are more sensitive to the market situation and their risk level is different.
- Hybrid REIT funds – funds that combine ownership of income-producing properties with financing of property owners.