Nate Ritchison, CFP® of Pure Financial Advisors explains what a real estate investment trust or REIT is and what the advantages and disadvantages are for different types of REITs.
So if you’ve decided to invest in real estate, there are a couple of ways to do this. The first is obvious. It’s a direct investment in real estate. You can go out and you purchase a residential property and then find tenants and be the landlord and manage that property. Now if that doesn’t appeal to you there’s another way of doing this. You can invest in real estate investment trusts or REITs.
Now there are many different advantages of REITs. But think of a REIT as what a mutual fund is for stocks: it’s a pooled investment with other investors. So what a pooled investment does is it allows you to go into different markets and use a minimal investment to maybe buy a big piece of property.
Another advantage of investing in your reads would be that in the U.S. they’re required by law to distribute 90 percent of their net operating income out to their investors. So this could offer a great way to supplement some of your retirement income with this passive income that you would receive.
Just like mutual funds allow stock investors to spread their risk out and focus on different areas of the stock market, so do real estate investment trusts within the real estate market. There are many different areas to invest within real estate investment trusts, especially on the commercial side. Real estate investment trusts can specifically target hospitals, or hotels, or office buildings, or apartment complexes, and then beyond that there are many different more niche areas to invest in within real estate investment trusts.
So if you’re considering purchasing REITs, then you have to decide where you’re going to purchase them from. There are a couple different avenues. You can either go to an exchange and purchase what’s called a publicly-traded REIT. And these are purchase right on the exchange, you know exactly what the price is each and every day. The other avenue is to purchase what’s called a private or a non-traded REIT. You go through a broker to purchase this. Something to be aware of when purchasing a non-traded REIT is that there is some liquidity risk. There’s no exchange, necessarily, to trade these REITs on.
Now if you need some help understanding what the role is that real estate and REITs might play in your overall retirement income plan, please reach out to us at PureFinancial.com.