If your goal is to build a robust portfolio of investment assets, may it be a fixed income source like bonds or stocks, then here is our suggestion. Take a look at REITs also known as the Real Estate Investment Trust. Generally REITs are specific kinds of investments that provide the opportunity to invest in real estate without the burden of managing or acquiring the property on your own. You can enjoy the luxury of investing in real estate property without actually owning it.
A question may come to your mind , Why REITs and What are its benefits compared to other investment opportunities? .
REITs generally offer a strong combination of dividend income and long-term growth. With REITs you can expect regular income from your investment and at the same time , your investment’s value also rises in years which ultimately creates a huge corpus for you in the long run. This makes REITs an excellent option to help you balance your other investments such as bonds, stocks or even cash on your account for savings.
Hope you heard about an important saying in the Financial world i.e “don’t put all your eggs in the same basket.”. Investing in REITs makes this saying true i.e. they can increase the diversification of your portfolio by distributing your hard earned money into various investment instruments.
What exactly is “REIT” ? [ REIT’s business ] :
They are the companies which control, operate or finance real property that generates revenue, such as malls, apartment buildings, office buildings, hotels, hospitals, warehouses etc. There are few ways REIT companies earn money from their investments.Some REITs earn their profit by collecting the rent from its tenants, while others make money by lending money to real estate and generating interest.
If you’re looking to add REITs in your portfolio you don’t have to buy a house or commercial property. There are multiple ways you could invest in it without actually buying it.
- Simply purchase shares of REIT companies listed in the market.
- You could invest in REIT-specific ETFs (exchange-traded funds)
- You can also invest in crowdfunding platforms for real estate that pool money from a variety of investors to purchase properties.
There are a myriad of REITs available that are focused on various kinds of real estate. Based on your investment objectives like regular income or long term growth, you can choose an REIT that can meet your needs.
Without wasting our time lets see the different types of REITs available in the market.
Different Types of REITs for Investing
Retail REIT
First in our list is Retail REITs.Simply put they are like an investment trust that invests in real estate that concentrates on malls, shopping centers as well as other retail areas in which stores are operating.
As on January 28, 2025 there were approximately 29 REITs that are listed in the FTSE Nareit U.S. Real Estate Indexes which provides investors with many options to pick from. Source
Before you jump into investing in retail REITs it is important to step back and examine the general retail market. In general the performance of retail REITs is directly related with the success of retailers and companies that lease space from them.
Retail REITs earn their revenue from the rents paid by their loyal and trustworthy tenants. If the stores are performing well, then they will pay rent on time and the REIT continues to earn steadily. Unfortunately the stores may struggle, perhaps because their sales are falling or customers choose online shopping instead of going to shop physically. Such retailers that are in financial trouble could not pay rent or default entirely. When such scenarios occur, REITs must scramble to find a new tenant to fill the vacant space, which isn’t always fast or simple.This is one of the main hurdles if you consider investing in Retail REITs.
So it’s better to do proper research before pouring money into retail REITs. So look for REITs with steady, solid tenants that are crucial and are less likely to go under within a short time. If the list of tenants include pharmacy stores, grocery stores then it’s a really good REIT. Such stores’ performance doesn’t depend on the economic condition, as they are all essential goods.
After having examined the whole industry and being confident about it, you can concentrate on the particular REIT Companies . Similar to every other type of investment, it’s important to determine the basic facts about a REIT like Does the company have a strong balance account?, Is the company profitable etc.
Retail REITs which have large cash reserves might be able to identify great opportunities. They can purchase top-quality real property at reduced costs when other investors have to sell. Reit funds that are well-managed usually thrive in these conditions, and can use downturns to build their strength.
So do a proper research before investing in a retail REIT and enjoy the fruits from your investment.
also read : Advantages of investing in multiple real estate properties
Difference between owner financing and Normal Financing
Residential REIT :
Resident REITs are a form of investment in real estate which specialize in the ownership and managing properties in which residents reside, mostly apartments as well as housing communities. REITs earn money by renting out tenants in these buildings.
If you’re considering investing your money in REITs for residential There are some crucial things to consider first. It’s not about whether the company owns apartment buildings, it’s about the location these apartments are, who’s renting them and how economic activity in the area is.
Some of the most lucrative areas for REITs that deal in residential real estate are located in cities in which the cost of buying a home isn’t feasible for the majority of people. Think of big cities such as New York City or Los Angeles, the price of owning a home in these cities is literally imaginary for many, and renting becomes the only feasible alternative. The high demand for rental means that landlords (in this case its REITs who own the properties) are able to charge higher rent, which can increase their earnings.
Therefore, a lot of best-performing residential REITs concentrate on large cities with high costs in which rental demand is strong all year round.
Apart from the above mentioned tip you should also examine the local trends for every region or city. Are there more people living in the area? Are new jobs created? Are more people coming in instead of moving out? . These are positive signs since when more people move to a city, usually for work opportunities, it means there is more need for homes.
If you see that the rate of vacancy is declining as well as rents are increasing it’s a strong sign that the rental market in your area is growing. This type of trend is good news for REITs with residential properties, since it allows them to fill their units quickly and also charge higher rents in the future.
As with all investment there are a few exceptions to this rule. Not all REITs for residential use are created equally. The most successful ones have strong financials which means they can manage their debts well and have sufficient cash to expand their business, or to withstand recessions. These are the businesses that are able to remain robust even when the market becomes a bit unstable.
Another important thing to be aware of is the demand and supply in the market for housing. If new apartments are being constructed too quickly in a certain location, it could cause an oversupply. This could mean that landlords will be forced to cut rents in order in order to fill their buildings. However, if supply remains limited and demand keeps increasing, residential REITs in the region could do very efficiently.
So REITs for residential properties can be an excellent investment option for those looking to make money from the housing market. However, as with every investment, the most important thing is to do a little research.
Mortgage REIT :
Mortgage REITs commonly referred to as mREITs are a distinct kind of investment trust in real estate which don’t invest in building or real estate directly. Instead, they invest in the loans behind those properties, to be more precise mortgages.
As on 28th January 2025, there are around 33 REITs for mortgages included on the Nareit index of the FTSE U.S. The Real Estate Indexes. Dividend Yield is around 11.39%.
Heard the names Fannie Mae and Freddie Mac ? These are government-backed companies which purchase large amounts of loans on what’s known as the secondary market for mortgages. Although they’re popular, they’re not necessarily the best options for regular investors. There’s a lot more involved in picking a reliable mortgage REIT than simply selecting a popular one.
One of the most important factors that can affect mREITs performance is the interest rate. If interest rates increase then the value of mortgages they own tends to fall which could lower the worth of REIT in itself. If rates increase quickly investors could be able to see the price of these REITs decline.
Another point worth mentioning is, REITs that are mortgage-related rely in large part on borrowed funds to finance their operations. They obtain this cash through loans which are both unsecured and secured. This type of borrowing allows them to increase their earnings, but it also increases the risk. If interest rates increase they become more costly to borrow money, which could reduce their earnings and diminish your mortgage’s value.
Mortgage REITs may offer huge dividends but they are very sensitive to changes in interest rates, leverage risks as well as fluctuations in the market. If you’re thinking about buying one of these, then it is recommended to do a thorough research and select the best mortgage REIT.
Healthcare REIT :
Healthcare REITs are undeniably the most lucrative real estate investment opportunities and the main reason behind this is the cost of healthcare continues to rise. These REITs specialize in acquiring and managing real estate properties that are used in the healthcare industry. Real properties like hospital buildings, medical centers, nursing homes and Retirement communities all come under this sector.
Healthcare REITs performance is closely linked to the entire medical system. The majority of the healthcare facilities they invest in earn revenue through a combination of occupancy fees, Medicare and Medicaid reimbursements and private insurance reimbursements.
So before choosing it is recommended to know about the background and experience of the company. REITs with a thorough understanding of these segments are better able to handle changes and capitalize on opportunities for growth. Additionally, businesses that have solid financials tend to perform better, particularly in times of economic instability or change in policies.
Another interesting fact is “More people are reaching retirement age, so demand for health services as well as senior care facilities are likely to increase. This could result in positive long-term effects for well-managed health REITs..
If you’re planning to invest in healthcare REITs you should look for a mix of diversification, expertise in healthcare and financial quality.
Office REITs :
Office REITs are real property investment funds that concentrate on operating and owning offices. They earn money by renting office spaces to businesses, typically with long-term agreements that guarantee steady rental revenue. Like any other investment “Office REITs” has both pros and cons.
Are companies hiring or laying off the employees ? If the economy is sluggish, unemployment will be more .This could result in more vacancies and a decrease in rent revenue to the REIT. If lots of office space is vacant in a specific city, that’s an indication of low demand. This could reduce rents and affect the profitability.
So before investing consider one important factor i.e. Location. Look at whether REIT is investing in areas that are expanding economically, attracting businesses. It is probably safe to invest in a REIT which has structures in tech-driven hubs such as Austin, Texas.
Another important point to look at is the company’s financial status .Do they have enough capital in place to make profit from opportunities, such as purchasing properties at a low price when the market is down? . REITs that have solid balance sheets and access to capital are better able to grow and withstand downturns.
For the last few years Office REITs are facing additional issues due to the increase of hybrid and remote work. Many businesses are cutting down their office space. Be sure to look for REITs adapting to the changing times, perhaps through making investments in co-working areas, tech campuses etc.
Summary :
Having a deep knowledge on REITs i.e retail residential healthcare, office and mortgage can help investors in taking decisions based on their risk appetite. Each one of the REIT mentioned above operates within an individual sector of the economy, and offers distinct advantages and disadvantages. Like any investment it’s important to analyze the strength of the financials as well as the market focus and management strategies. Hope we have covered deep information on different types of REITs for investment.
