In this video I’m going to break down everything about investing in REITs. Real estate investment trusts, or REITs, can be fantastic ways to add both growth and income to your overall portfolio, while adding diversification at the same time. So, let’s do it!
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What is a REIT?
A REIT or Real Estate Investment Trust, is a unique type of company that allows investors to pool their money to invest in real estate assets. Some REITs simply buy properties and rent them to tenants, others develop properties from the ground up, and some don’t even own properties at all, choosing to focus on the mortgage and financial side of real estate.
Although this is an oversimplification, you can think of real estate investment trusts like a mutual fund for real estate. Hundreds or thousands of investors buy shares and contribute money to a pool, and professional managers decide how to invest it.
The purpose of REITs is to allow everyday investors to be able to invest in real estate assets that they otherwise wouldn’t be able to. For example, could you go out and buy a high-rise office tower or shopping mall? Could you buy a portfolio of mortgages, or would you even know how to go about doing this? Probably not. However, a REITs allow you to put your money to work in these ways. You can even gain exposure to billion-dollar commercial property portfolios with just a few hundred dollars to start.
The two main types of REITs – Equity & Mortgage REITs
Before we go any further, let’s take a minute to discuss the two different classifications of REITs. As we’ll see later, there are REITs that specialize in a wide variety of asset types, but all REITs can be dropped into one of two buckets.
• First, equity REITs are the type of real estate investment trusts that own properties as their primary business. For example, a shopping mall REIT or a senior housing REIT would be considered an equity REIT. Going forward, you can assume the term REIT refers to equity REITs unless specified otherwise.
• Second, mortgage REITs invest in mortgages, mortgage-backed securities, and other mortgage-related assets. Generally speaking, these companies borrow large amounts of money at lower, short-term interest rates, and use this money to purchase 15- or 30-year mortgages that pay higher rates. These are very different investments than equity REITs — in fact, they aren’t even classified as being in the real estate sector. Mortgage REITs are considered to be financial stocks, just like banks and insurance companies.
• There are a few REITs that own both property and mortgage assets, and these are known as hybrid REITs. However, the overwhelming majority of REITs invest in either one type of real estate asset or the other.
Types of REITs to invest in
There are REITs that allow you to invest in just about any type of commercial property you can imagine. They are:
• Mortgage REITs
• Residential REITs
• Office REITs
• Industrial REITs
• Healthcare REITs
• Self-storage REITs
• Retail REITs
• Infrastructure REITs
• Timberland REITs
• Hospitality REITs
• Data-center REITs
• Diversified REITs
• Specialty REITs
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