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What’re the 5 types of real estate investment trusts?

Real estate investment trusts are considered a great form of investment for many reasons. This includes a lower risk rate with a high potential for returns. Also, other benefits like transparency, liquidity, and diversification… make it a perfect addition to any investment portfolio. Also, a REIT gives the opportunity to average Americans and investors to invest in income-producing properties.

REITs are an ideal investment if you want to diversify your portfolio. Not only that, REITs generate an attractive income with a low-rate risk. That’s because they tend to be less risky and more stable than other forms of investments.

That said, REITs themselves aren’t one thing! And, to succeed as an investor, you should understand each type & learn how it works. Normally, there are three main types of REITs. However, in this article, we’ll discuss the 5 common sub-types of real estate investment trusts.

Accordingly, in this article, we’ll introduce the 5 sub-types of REITs and help you understand how each one works.

Here are the 5 sub-types of REITs

Retail REITs

This type focuses mainly on owning and renting retail real estate assets. It usually includes shopping malls, grocery-anchored shopping centers, and other freestanding properties. 

Speaking of freestanding properties, they’re rented to tenants who must cover their rent and operating expenses. So, if you want to rent a freestanding property from a REIT, you must pay the rent… while covering all the operating expenses at the same time.

In America, retail REITs are considered one of the most common types of investment. This means that your favorite shopping mall is properly owned by a REIT. In truth, If you live in the U.S, you’re possibly investing in retail REITs… Even if you’re not aware of it. 

As a matter of fact, you might own investments in this type of REITs thanks to your 401k or TSP. This makes retail REITs a great option for your retirement plans.

Enough with definitions now. Let’s say how to invest in retail REITs.

Before investing in retail REITs, you should, first, study the retail industry and its economic condition. Ask yourself, if the retail industry is stable at the moment. And try to predict how it will be in the future. This evaluation is essential to decide whether the investment is worthy or not.

After all, retail REITs generate income through rent payments from retailers. However, if tenants couldn’t pay their rent due to poor sales, it will affect your ROI drastically. This makes it a bad investment for you.

So as an investor, you should invest in strong retailers with a steady cash flow. Ideally, you should opt for grocery and home improvement stores.

After you examine the retail industry and find the strongest retailers, it is time to look for the ideal REIT company. This means you should find a company that has steady profits with as less debt as possible. In other words, you should work with a company that ensures a high return on investment with low risks.

Residential REITs

In a nutshell, this type of REIT owns and manages residential properties. Mainly, it focuses on apartment buildings, manufactured houses, single-family homes…, etc. 

Residential REITs generate income by either selling or renting space and housing properties to tenants. Moreover, they operate within specific markets and deal with a particular class of residential properties.

How to invest in residential REITs 

Markets with low house affordability tend to be the best to invest in. That’s because when the price of single homes is high, most tenants are forced to rent properties. This allows property owners to increase the monthly payments tenants pay for rent… thus, promoting an increase in profits.

Moreover, when investing in residential REITs, always look for places with a high population & employment. That’s because people are more likely to rent where there is a booming economy & job opportunities are high. Thus, it increases the demand for renting & buying housing properties.

Healthcare REITs

Healthcare REITs specialize in medical-related real estate properties such as hospitals, medical centers, retirement homes…, etc. As a result, succeeding in this type of REIT is entirely related to the healthcare industry. However, what makes this subsector interesting is the fact that healthcare costs keep rising in the U.S. So, as the costs increase, the value and profits of healthcare REITs also increase.

What to look for when investing in healthcare REITs

Look for investments in a variety of property types as well as a diverse collection of clients. Spreading your risk is better than concentrating your investment in one place. You should also look for companies with substantial healthcare experience, stable balance sheets, and lots of access to low-cost capital.

Office REITs

Office REITs sell and rent office real estate properties only. This includes skyscrapers, office parks, office buildings…, etc. Usually, office real estate investment trusts operate within a specific market like business districts & suburban areas. Similarly, this type of REIT also focuses on a specific class of clients like government agencies and firms.

Once you decide to invest in this type of REIT, you should ask yourself the following questions:

  • What are the economic conditions and the unemployment rate?
  • How high are vacancy rates?
  • How is the economy in the region where the REIT invests?
  • How much capital does it have available for purchases?

Answering the above questions will help you assess the economic situation of your target market. It will also help you measure risk percentage VS the potential of ROI while finding the best companies to work with.

Mortgage REITs

Mortgage REITs aid in supplying the real estate market with crucial liquidity. Mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS) are all investments made by mREITs. While some mortgage REITs participate in both RMBS and CMBS, most concentrate on the residential or commercial mortgage markets.

Similar to purchasing any other publicly traded stock, you can purchase shares in a mortgage REIT that is listed on significant stock exchanges. Additionally, shares can be bought through mutual or exchange-traded funds (ETF). Because of their history of paying out relatively substantial dividends, investors have historically seen value in mortgage REITs.

Pros & cons

Investing in any type of these REITs brings its risks and benefits. And your success as an investor in REITs depends mainly on the economic condition. However, here is some of the benefits and risks of investing in REITs.

Benefits

  • Potential for high-yield dividends
  • Portfolio diversification
  • Liquidity

Risks

  • Sensitive to interest rate rises
  • Dividends are taxed
  • Real estate industry-related risks

Final thoughts

Although they are different REIT types, they all have something in common. For instance, all REITs have a high potential for returns on investment with a very low-rate risk. This alone makes investing in REITs an ideal choice for investors.

All in all, we hope this article has answered your questions and provided enough insight into the 5 types of REITs. To learn more about real estate investment trusts, make sure you check our other articles.

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1 month ago

[…] If you want to learn more about REIT types, check out our article here. […]

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1 month ago

[…] main three types we’ve mentioned so far aren’t the only types. Interestingly, there are other common types that you can invest in. They […]

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