Free «Real Estate Investment Trust» Essay Sample
One of the ways of alternative investments nowadays is the investment in real estate, which is possible with REIT, very popular in developed countries of the world. Real Estate Investment Trust can be defined as a company which owns and manages real estate or real estate assets. It allows the investors to get the income due to real estate ownership. Thus, there is no need to go somewhere and buy commercial real estate. Real estate property of REIT may include apartments, healthcare, self storage, shopping centers, office buildings, various resort places, hotels, mortgages etc.
Numerous Real estate investment trusts are listed in Securities and Exchange Commissions. However, they can be publicly or not publicly traded REITs. The last ones are called non-traded REITs. It is essential to inquire about various types of trusts before making your choice where to invest. Furthermore, each of the REITs has its risks.
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REIT gets special tax compensations and offers the investors high income being liquidity method of real estate investment. REITs may be of several types. The first one invests directly in buying real estate, which is its capital or their assets’ price. REIT receives income due to the fact that it gives this real estate for rent. Another type of REIT invests money in mortgages. It gives loans to the owners of real estate according to mortgage agreement, purchases already existing mortgages or provides securities with mortgages. This type of REIT gets its income through interests it pays to a loaner. The third type of REIT unites previously described REITs. Such REITs get their profit by investing both in real estate and mortgages (Evensen, p.2-4).
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A company can be called a REIT only in case when the major part of its assets and profits is connected to real estate investment and has to deal out at least 90 percent of its taxable profits to shareholders a year in the form of dividends. As far as REITs have to pay 90 percent of income back to investors, only 10 percent of income can be reinvested again in business. Moreover, there are other necessary conditions. First of all, a company should be a taxable institution, but with REIT status. Secondly, it is ruled by a board of directors or trustees. Thirdly, it has shares that could be easily transferred. Fourthly, such company has at least one hundred shareholders after one year functioning as a REIT. Fifthly, it invests minimum 75 percent of total capital in real estate assets and cash. Finally, such company receives at least 75 percent of its gross income from real estate sources. For instance, it can be rental payments from apartments or interests on mortgages (SEC, 2011, p.1).
The shares of the majority of real estate trusts are traded on the stocks. They may be purchased by a broker as well as shares of any other company. However, not every investor has time and specific knowledge to distinguish between one or two the most perspective trusts according to their possible income among other two hundred real estate investment trusts. That is why many unprofessional investors, who do not want to study the documentation of trusts, would rather address investment funds, mutual funds or exchange-traded funds. They are specialized in investments in REIT. The investor actually purchases the portfolio of shares of real estate trusts when buying the assets of such funds. He/she automatically solves the problem of choice and diversification. Thus, in this case the investor will have to share potential income as there are fees for the manager and pay other expanses concerning the activities of the fund.
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Individual investors may invest their money in REIT directly by purchasing their shares on the stock or by putting money into investment fund, which specializes in real estate investment. Additional benefit of investing in REITs is that the majority of companies offer Dividend Reinvestment Plan (DRIP). It is a plan offered by a corporation. It allows the investors reinvesting their dividends payout by purchasing additional shares or fractional shares on the date of dividends payout.
There are various ways of investing in REIT. Firstly, investments can be performed in publicly traded REIT by getting the share through a security mediator. Moreover, the investors can buy a preferred stock, common stock or debt securities. They can ask for a help in a broker, advisor or finance analyst in order to be able to analyze their finance opportunities and perspectives. The investor may ask to look through the copy of company’s annual report or any other necessary documentation.
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There are some necessary points to consider before investing in REITs. First of all, it is the ability to increase their income in an appropriate way. Secondly, it is to find out whether the management staff is capable of developing good strategies for new opportunities and completing new projects.
The majority of REITs specialize in certain areas. Potential investor has the right to access this particular sector of investments in the fund summary. It is essential for the investor to see if this sector is developed or retarded. Sectors in bad economy are more challenging and risky in comparison to those in metropolises, for example.
Potential investor should look through REIT’s documentation whether the fund pays the dividends from operations or if it uses additional capital. If the REIT is successful, it uses its own assets to pay all the expenses. Moreover, one should pay attention to immediate sales of real estate. This may disfigure financial numbers.
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Investing in REITs has both advantages and disadvantages. The first advantage is a regular income and the growth of investments price. REITs can get large profits according to the growth of real estate prices. Secondly, it is liquidity. Many REITs deal with numerous stocks and the investors can sell and buy shares of these companies. Thirdly, it is low expenses. REITs offer their investors access to real estate markets with low expenses. Fourthly, it is diversification. Diversification allows individual investors putting their capital into different aspects of real estate. The investor purchases the share in various real estate objects. They may be situated in various regions or sectors, which reduce the risk of the price downfall of any specific object.
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Furthermore, it is tax advantages. REIT has very beneficial tax status for an investor. Finally, REIT protects against inflation. The main source of income of real estate trusts is rent payments that are usually correlated to the growth of the general level of prices. There is particularly no example of REITs bankruptcy. It means that they are much more reliable than broker’s services or investments in shares of major companies that can be broke during unfavorable market conditions. The best evidence of REIT’s reliability is that their main investors are insurance companies and pension funds (SEC, 2011, p.4).
On the other hand, there are several disadvantages to consider. First of all, the prices of their shares do not grow very fast. So, it is a reason for an inexperienced investor not to wait for immediate profits. Secondly, it is desirably to choose more than one REIT to get income from diversification. Thirdly, REITs are risky as well. They depend upon interest rate. Real estate markets tend to depend on cyclic downfalls. In addition, the real estate investments should not be performed directly. In case of any accident, the investor many be sued or hurt. This may lead to his/her bankruptcy or hardships. The way out is to use specific legal structures. Furthermore, there is less control over the investments and profits unlike having property. Lastly, there are no tax advantages as in case of owning a property.
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To sum up, REITs are very popular companies for money investment in various spheres and regions. Their assets haggle on stocks and they are the source of dividends. The investors of REITs can be individuals or institutions including pension funds, insurance companies, bank trust departments or mutual funds. Finally, it is necessary to know where the REIT’s projects are located. If these projects are located in one community or geographic area they may be sensitive to recession in economy (Woychuk, n.d.).
To own real estate directly or indirectly it is investor’s choice. Thus, if to consider carefully all advantages and disadvantages of REIT, one may get much income from investments. Moreover, there is always a choice if to be aware of one’s investments and take care of the operations on your own or to make use of various mediators. Such organizations like investment funds, mutual funds or exchange-traded funds would help the investor to keep up with REIT’s operations and his/her investments.