This article will discuss the differences between equity REITs and mortgage REITs. It will also discuss the advantages and disadvantages of investing in REITs.
What is a REIT?
A REIT is a real estate investment trust, which is a company that owns, operates, or finances income-producing real estate. REITs were created in the 1960s as a way to allow small investors to pool their resources and invest in large-scale commercial real estate projects.
There are two main types of REITs: equity REITs and mortgage REITs. Equity REITs own and operate income-producing real estate, such as office buildings, shopping malls, and apartments. Mortgage REITs, on the other hand, lend money to real estate owners and operators.
Why Were REITs Created?
REITs were created to allow small investors to invest in large-scale commercial real estate projects. Before the creation of REITs, only wealthy individuals and institutions had the resources to invest in these projects.
What Are the Advantages of REITs Over Investing in Direct Real Estate?
There are several advantages of investing in REITs over investing in direct real estate. First, REITs offer greater liquidity than direct real estate. This means that selling your investment in a REIT is easier than selling a direct real estate investment.
Second, REITs offer the potential for higher returns than direct real estate. This is because REITs are required to pay out at least 90% of their taxable income as dividends to shareholders. This leaves them with less money to reinvest in their properties, which leads to lower growth.
Third, REITs are less risky than direct real estate. This is because REITs are diversified across many different properties, which means that the failure of one property is not likely to have a significant impact on the overall performance of the REIT.
What Factors Should You Consider When Analyzing a REIT?
When considering investing in a REIT, you should take into account a number of factors, including the REIT’s size, its financial stability, its dividend yield, and its growth potential.
The size of the REIT is important because it will have an impact on the REIT’s liquidity. A large REIT is more likely to be liquid than a small REIT.
The financial stability of the REIT is important because it will have an impact on the REIT’s ability to pay its dividends. A financially stable REIT is more likely to be able to pay its dividends than a less stable REIT.
The dividend yield of the REIT is important because it will have an impact on your return on investment. A REIT with a high dividend yield is more likely to provide a higher return on investment than a REIT with a low dividend yield, but a high dividend yield isn’t indicative of the health of the REIT. A REIT could be facing defaults on some of its mortgages which causes the stock to fall, but the dividend yield could look higher than usual. So it’s important not to look at the dividend yield when deciding to invest in a REIT.
The growth potential of the REIT is important because it will have an impact on the REIT’s future profitability. A REIT with high growth potential is more likely to be more profitable in the future than a REIT with low growth potential.
Conclusion
REITs offer small investors the ability to invest in large-scale commercial real estate projects. They offer greater liquidity than direct real estate, the potential for higher returns, and less risk. When analyzing a REIT, you should consider its size, financial stability, dividend yield, and growth potential.
