How Does Real Estate Investment Trust Work?

Table of Contents

What is a Real Estate Investment Trust?

A real estate investment trust (REIT) is an investment fund or company that owns income-producing real estate. These trusts resemble mutual funds as they pool the capital of various investors. REITs are well-known for providing large dividends to investors with constant growth over the years. These are

REITs are owned and managed by a company. These companies primarily invest in properties. These investments then allow investors to earn from rentals and other property income-related payments. Like mutual funds, REITs allow investors to pool their funds together to invest in assets. There’s no active management involved for investors, making it a great income source for passive investors.

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How does Real Estate Investment Trust Work?

Real estate investment trusts are companies that collect money from various investors and pool it together. Then they invest the collected money in real estate. REITs are one of the most prevalent types of investments. They have an active market, which allows investors to trade them. The frequency and size of these transactions allow investors to benefit from the liquidity that comes with REITs.

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Some REITs may specialize in a specific type of property. However, others may generalize and invest in a wide range of properties. Based on these real estate investment trusts may come in various types.

What are the different types of Real Estate Investment Trusts?

Real estate investment trusts may come in various forms. These include the following types.

Equity REITs

Equity real estate investment trusts are the most prevalent type of REIT. These trusts acquire, manage, build, renovate and sell income-producing real estate. The primary source of revenue in these REITs are rental incomes through real estate holdings. Investors prefer equity REITs for the steady and stable income they provide.

Mortgage REITs

Mortgage REITs are trusts that invest in mortgages, mortgage-backed securities, or other similar assets. They buy mortgages from original lenders and collect the money over time. With this type of REIT, the primary source of income is the income from the interest on mortgage investments. These trusts distribute most of the profits that they generate to investors.

Hybrid REITs

As mentioned, most REITs specialize in a particular type of investment. However, some REITs may invest in different areas. Hybrid REITs are one of those and include a combination of equity and mortgage REITs. These trusts hold real estate properties while also investing in commercial property mortgages.

What are the advantages and disadvantages of investing in Real Estate Investment Trusts?

Investing in REITs is highly profitable for investors. These are highly liquid investments and can be a great way to diversify an investment portfolio. REITs are also transparent in their dealings, which most investors prefer. Most importantly, they provide a steady and stable income source, which might not come with other investments.

However, REITs come with low growth potentials. These trusts also charge high management and transaction fees, which can limit their profit potential. Investments in REITs are also subject to market risk. Lastly, dividends from REITs are taxable as regular income instead of a dividend and may add to investors’ tax expenses.

Conclusion

Real estate investment trusts are investment funds or companies that invest in income-generating real estate. They are similar to mutual funds as they pool capital from various investors and invest it into real estate. Investing in real estate investment trusts can have some benefits but may also come with some drawbacks.