If you’re interested in commercial real estate, but don’t know where to begin, a real estate investment trust (REIT) can be a good way to get your feet wet, while avoiding much of the inherent risk. A REIT turns the commercial real estate market into the stock market, allowing investors like yourself to purchase shares in large-scale property portfolios. Like shareholders who benefit when their corporations do well, those who have stakes in a REIT profit from the income its properties generate.
There are many types of REITs, but the two most popular are Equity REITs and Mortgage REITs. Equity REITs offer the most for those curious about commercial real estate. The companies behind equity REITs purchase commercial properties, then lease the space to renting tenants. After paying the expenses associated with owning the property, the REIT distributes the remaining profit as dividends to the shareholders.
Mortgage REITs invest your money in residential and commercial mortgages, as well as mortgage-backed securities. Where equity REITs make money on rent income, mortgage REITs rely on the interest accrued from mortgage payments. These REITs can focus on both the residential and commercial property markets, but tend to specialize in just one.
In order to qualify as a REIT, at least 75% of the trust’s investments must be in real estate, and it must derive 75% of its income from rent, mortgage interest or real estate sales. To fight the concentration of shares, no more than half of them may be held by five or fewer individuals. Finally, REITs are required by law to maintain dividend payouts of 90% or more—good news for income-hungry investors.
There are multiple ways to get involved with an REIT. Many of the larger trusts are listed publicly on the major stock exchanges. You can search for one that interests you here. There are also unlisted public REITs and private ones. A broker, investment adviser or financial planner can help analyze the different REITs and recommend an appropriate one based off your needs.
Check back on MyNOI.com on Wednesday to learn more about the pros and cons associated with investing in REITs.