How Real Estate Investment Trusts shaped Glasgow guide, Office advice, Workplace tips
How Real Estate Investment Trusts Have Shaped Glasgow’s Architecture
22 July 2021
Real Estate Investment Trusts are among the popular investment channels in real estate whose income is primarily divided to shareholders. Most REITs have a high return, but like any other high-yield asset, high returns carry more risks. Therefore, investors should figure out if the estimated profits are worth the risks.
What are REITs?
Generally, REITs are real estate firms that own and operate real-estate structures on behalf of investors. REITs invest in a plethora of real estate properties, such as commercial buildings, office buildings, and parking lots. As per the law, REITs should submit a minimum of 90% of their revenue to shareholders as dividends. While some distribute their profits quarterly, others payout dividends annually, making them a perfect interest-earning option for retirees looking for a continuous stream of income.
Types of REITs
Common types of REITs include;
- Retail REITs
Retail REITs account for approximately 24% of REITs, representing the largest single investment type in America. They include investments made in freestanding retail and shopping malls. Before investing in retail REITs, you should consider the specific retail industry. Try to examine if the industry is financially healthy at the moment and its potential in the future.
Keep in mind that retail REITs generate revenue from rent charged to tenants. Therefore, if retailers have cash flow issues stemming from poor sales, monthly payments might be delayed or defaulted. Investing in the best REITs UK 2021with strong anchor tenants, such as home improvement and grocery stores, is the best way to avoid this.
- Residential REITs
As the name suggests, residential REITs own and operate rental apartments and manufactured housing. Like retail options, you should consider several factors before investing in residential REITs. For instance, the most profitable apartment markets are areas with affordable houses since the high cost of single units in some parts forces people into renting out.
That said, you should consider population and job availability before investing in residential REITs. An increase in the number of people flowing into a city due to readily available jobs signifies growth in the economy. Reduced vacancy rates coupled with increasing rents is a sign of increased demand.
- Healthcare REITs
Healthcare is an interesting investment opportunity, especially as healthcare costs continue increasing. Healthcare REITs focus on hospitals, nursing facilities, retirement homes, and alike medical centers. The success of these REITs significantly depends on the general healthcare system. Most operators rely on Medicare/Medicaid reimbursements, occupancy fees, and private insurances. Provided the funding of healthcare schemes remains uninterrupted, so do healthcare REITs.
- Mortgage REITs
Interestingly, only 10% of REITs are in mortgages. Mortgage REITs also have few players and significant government control. Like other types, this type has its own set of risks. For instance, a slight increase in interest rates translates to decreased mortgage REITs values. Always assess comprehensively and consult a financial advisor before investing.
- Office REITs
As the name suggests, office REITs specialize in office buildings. Such companies generate profits from tenants signed under a long-term lease. However, this heavily depends on vacancy rates, location of the investment, and state of the economy.
How to Choose a REIT?
Superficially, REITs generate revenues by collecting rent or leasing their properties. However, making money from REITs requires an understanding beyond this. As an investor, you should consider several factors before investing in any REIT type. Consider the following;
- Assess the risks
You should understand the various risks before settling down on any investment. Since REITs make money from rent and lease, ensure that you assess the quality of tenants, REITs’ business strategy, length of lease, average occupancy rate, and new projects developed by the REIT.
- Understand various sectors
As mentioned above, you can invest in up to five different REIT types. Therefore, always do due diligence and research the sector deeply before investing in the REIT you are interested in. Even though all REITs generate income from properties, every sector has unique risks. That aside, ensure that you invest in REIT companies with proven track records of running profitable businesses in a particular sector.
- True total return
REITs are returns investment vehicles where shareholders get income from dividends and capital appreciation of properties. However, you might be tempted to invest in a REIT because of its attractive dividend yield, which is always higher than dividend stocks. Just to mention, dividend yields are payments that shareholders receive from REIT companies on a monthly or quarterly basis. Instead of making your decision based on dividend yield, consider the true total return of the investment.
The Bottom Line
Investing in REITs is undoubtedly a profitable passive income-generating alternative to buying properties directly. Coupled with other forces, REITs have changed the real-estate world. Initially, real estate was a reserve for the rich and connected. However, these barriers have been crashed, and it is possible to generate revenue through real-estate projects at a fraction of what it would initially cost.
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