Jason Thomas, CFP® is a financial educator with Pure Financial Advisors. In this video, Jason explains the purpose of Real Estate Investment Trusts (REITs) in an investment portfolio, the different types of REITs, and issues to consider before investing in REITs.
So how do REITs work? Like mutual funds or other pooled investments, REITs – which are real estate investment trusts – allow investors to gain access to many assets. In this case, real estate-related assets, with a minimal investment, allowing for a convenient purchase and a larger amount of diversity than may otherwise be achievable with direct ownership.
Think of REITs as doing for real estate, what mutual funds do for stock and bond investors. A REIT may be a good fit for investors who want exposure to real estate, but do not wish to, or do not have enough capital to, purchase assets directly. Those who wish to invest in income-producing assets may be particularly attracted to REITs since in the United States they must distribute at least 90 percent of their taxable income to investors to avoid negative tax consequences.
There are two main types of REITs: equity REITs invest in the properties directly, and mortgage REITs allow owners to invest in mortgages or mortgage-based securities inside the REIT. Greater degrees of specialization within the REIT space are also available. Some focus on residential, some focus on commercial, including but not limited to additional specializations among hospitals, hotels, office buildings, apartments, and many other types of properties. Some might focus on a specific geographic area or another niche. These can be as diverse as the field of real estate itself. It’s important to understand how you purchase a REIT, because some are publicly-traded, meaning they trade on an exchange like a stock, for example. But some are non-listed or private. If you are going to buy a non-listed or private REIT, be sure that you understand any liquidity issues with that specific REIT that you are considering. So REITs are a convenient way for investors to get access to real estate and get some immediate diversity, as well as income. If this sounds like a good fit for you, then a real estate investment trust may be an option that you want to consider. If you’d like to discuss how this could potentially fit into your overall retirement savings plan, or how it would fit into your financial situation overall, please contact us at PureFinancial.com.