Before exploring the reasons to invest in REITs let us first get into the basics of REIT and its types.
What is REITs?
REIT stands for Real Estate Investment Trust. It is similar to that of a mutual fund, but instead of investing in stocks or bonds, it tends to invest in the real estate. The trust owns, operates or even finances income-producing real estate as per their needs. These like other securities trades on major stock exchanges and provide liquid stakes in real estate to the investors.
Types of REITs:
There are two types of REITs namely Equity REITs and Mortgage REITs:
- Equity REITs: This type of REITs own large commercial buildings, retails storefronts, hotels, or apartment buildings. The returns are earned by giving these buildings on lease and subsequently dividends are paid to the investors.
- Mortgage REITs: This type of REITs do not own the properties themselves, but the debt on the properties. These own mortgages against the properties and collect payments.
5 Reasons to invest in REITs:
Investing in REITs can be a very fruitful and beneficial investment for you. Following are the 5 reasons why you should invest in REITs:
- Diversification: In current time the concept of diversification in the portfolio is very popular. The reason being it allows you not to keep all your eggs in a single basket. In diversification, you tend to structure your portfolio in such a manner that the investment amount is divided into various portions which are invested in different assets and securities. This is a very beneficial practice and is very much taken care of when building a portfolio. This helps in diversifying risk quotient which means in a case when a particular stock or sector witnesses a rough patch then you lose on only a part of your investment which could have been a loss on full investment in an otherwise case.
- Good Returns: Due to development going on a massive scale across the country, real estate is prospering. This has resulted in the returns from the REITs to be good and very competitive than other traditional investments. It has a long-term investment hedge.
- Stable Income: Before becoming popular among the common investors REITs had been very favorite among the retired personals due to the stable income it provides. REITs are less volatile than corporate profits and thus offers safer dividends. These stable dividends out of the lease/rental income have made REIT a favorite investment avenue.
- Tax Efficiency: Dividends of REITs are non-taxable at the corporate level. Which means unlike other securities which pay tax at the corporate level which could be as high as 35%, REITs save that 35% of taxation at the corporate level which would mean extra dividends for the shareholders.
- Democratic in nature: Since REITs need to pay their dividends regularly and often have to get involved in raising funds for new projects via new debt/equity offerings. They are far more disciplined and democratic in their operations.
REITs have been a beneficial investment avenue which is very beneficial due to above 5 reasons and is one of the must-haves in the portfolio. If you have yet not invested in REIT, then make your investment soon. Happy investing!!!