Real estate investment trusts (REITs) own a variety of facilities, including shopping centers, movie theaters, office parks, hotels, and hospitals. A REIT may diversify into several property types or focus on a particular area of real estate. There are various benefits to investing in REITs, especially for income-focused investors. And while the REIT industry as a whole currently faces concerns, REITs have historically performed well.
What a REIT Should Have
Compared to buying real estate directly, REITs provide a number of benefits to ordinary investors. Your investment is liquid, to start. Shares in REITs, which trade like stocks on an exchange, can be bought and sold. In contrast to investing directly in real estate, which sometimes necessitates a far larger commitment, shares of REITs also have minimal investment minimums.
Rent and lease payments from the buildings that REITs own provide revenue. A REIT’s taxable income must be distributed to shareholders in the form of dividends for the vast majority of the time (90%) of the time. Investors frequently depend on REITs as a source of consistent cash flow as a consequence, albeit the shares can also increase in value if the real estate assets do.
When you’re ready to buy into a REIT, keep an eye out for rising earnings, which are a result of better revenues (higher occupancy rates and rising rents), lower expenses, and new business prospects. You must also thoroughly investigate the management group in charge of the REIT’s properties. An underused building’s amenities and services may be improved by a strong management team, which will raise demand.
REIT Warnings
It’s crucial that you avoid considering REITs as a standalone investment asset. To choose the appropriate kind of REIT for your portfolio, you must first consider market trends.
For instance, the popularity of internet shopping and the decrease of suburban communities have both contributed to a reduction in mall traffic (this is the first time since the 1920s that urban growth has outpaced suburban growth). Therefore, REITs that invest only in or significantly rely on malls will be riskier than those that engage in other types of real estate.
Or use lodging. You may invest in the travel sector by purchasing a REIT that specializes on them. Even if the sector may be doing well at the time, hotels run the risk of suffering from decreased business travel as businesses search for methods to save expenses and video conferencing grows more popular.
In terms of broader economic trends, low inflation and stagnant wages, like those the United States experienced in the 2000s, frequently limit the development potential for REITs since they restrain the ability to raise rents. Despite these challenges, REITs have been performing well.
A Far-Thinking REIT
Focusing on the future is essential. For instance, the decline in traffic to suburban malls mentioned earlier and an increase in street retail are both effects of millennials preferring urban life over suburban living (urban shopping strips anchored by a grocery or other major retailer). One REIT saw the trend before others and positioned itself properly.
Acadia Realty Trust (AKR) concentrates on supply-constrained, densely populated metropolitan locations with significant entry hurdles. It also adopts the stance that one should avoid developing a romantic attachment to any one merchant in particular since what is trendy now could not be so tomorrow. Instead, it makes an investment in a street, block, or building, giving it the flexibility to make changes as needed to accommodate popular merchants. However, what matters most in this situation is that Acadia Realty Trust has literally looked further than its competitors by making significant investments in street retail. The REIT has 84 buildings in its core portfolio, comprising 4.2 million square feet, with a market worth of $2.30 billion. As of October 2018, it has a dividend yield of 3.6 percent.
Conclusion
Regardless all the benefits, no one should only invest in REITs. These should always make up a component of a diversified portfolio, just like any other asset type.
