What are real estate investment trusts and how can you benefit from them? Simply put, real estate investment trusts (REITs) make it possible for anyone to start investing in real estate without assuming the risk that most real estate investments have. This dynamic investment strategy is like investing in company stock or mutual funds. Stockholders of REITs earn a portion of the income produced from rents without dealing with the traditional aspects of owning real estate; such as buying, financing, and managing the physical property.
These types of trusts are beneficial to consider for your estate plan. Below, we’re exploring the benefits that you can enjoy from creating a real estate investment trust, and how this safe and financially sound investment strategy works for your estate planning needs.
What is a REIT?
Real estate investment trusts are companies that own and operate income-producing real estate. A REIT is structured similarly to a mutual fund, meaning that many different investors contribute to the pool of money in the trusts. REITs are a competitive thing to add to your estate planning portfolio, as you don’t need to purchase physical property and manage its day-to-day maintenance, as you would with a traditional real estate investment. REITs also provide investors with a steady income stream and are traded similarly to stocks, making this a liquid investment in your estate planning process. Physical real estate, in contrast, is illiquid in nature and volatile to the market’s demands.
How does a REIT work?
In the United States, REITs collectively invest over 3.5 trillion dollars in assets in over 500,000 properties across the country. These companies invest in a variety of properties that include:
- Office spaces
- Apartment complexes
- Data centers
Most real estate investment trusts focus on one property type, while some diversify and hold many different types of real estate. Since REITs work in a way that is similar to stocks and mutual funds, they are generally easy to understand. The income that the properties generate is paid out to shareholders in a dividend.
Types of REITs
Not all REITs are the same. The three main types of REITs are:
- Equity REITs: This is the traditional type of real estate investment trust, and many equity REITs are listed on public stock exchanges. These trusts invest in many of the property types listed above and generate income through rent paid by tenants.
- Mortgage REITs: Mortgage REITs generate revenue from the interest charged on mortgages issued to commercial real estate investors. They also generate revenue indirectly by acquiring mortgage-backed securities. Mortgage REITs, otherwise known as mREITs, are prone to fluctuations when interest rates change.
- Hybrid REITs: This type of investment trust uses the strategies from equity and mortgage REITs to produce income for investors.
What are the benefits of pursuing REITs in estate planning?
Real estate investment trusts are a popular investment for seasoned investors and beginners alike. The main benefits that come from REITs include:
Investing in a REIT allows investors to diversify their portfolios without assuming much of the risk that physical property ownership would bring. Diversified REITs own a variety of different property types, allowing investors to gain exposure to many other real estate types. Many investors choose to add REITs to their portfolio in addition to stocks and bonds, as they often complement the returns that other investment types provide.
Since many REITs are listed on public stock exchanges, all types of investors can contribute to their investments and reap the rewards that REITs provide. Since REITs are liquid, investors treat them like trading stocks and can pull their investments at any time.
3. Stable returns
REITs provide strong dividends and give investors the potential for appreciation over time. This makes them a relatively stable investment for long-term use and for your estate planning needs.
4. High dividends
Real estate investment trusts are required to give 90 percent of taxable income to investors in the form of dividends. This dividend is much higher than other investments and has generally performed well while acting as a hedge against inflation. This makes REITs an attractive choice looking for a high dividend yield in their estate plan.
What are the risks of REITs?
Any investment that you make (for your estate plan or otherwise) has risks. Potential drawbacks include:
1. Market risk
Since REITs are investments in real estate, the returns are subject to the market. Fluctuations in property values, as well as demand and occupancy, can influence your performance negatively.
2. Interest rate risk
When the Federal Reserve raises interest rates, it’s less likely that tenants will want to lease. The rise in interest rates also affects property values and occupancy rates, making REITs less stable in different cycles.
Are you considering estate planning soon?
There’s no time like the present to prepare your estate and invest in your family’s well-being in the event of your passing. The experts at Ascent Law are here to help you through every step of the process. For more information and to book your free intro call today, please visit our website. We look forward to serving you!