Wealth Management

What is a Real Estate Investment Trust (REIT)?

Published by Bob Gustafson

Real Estate Investment Trust (REIT)

If you’re thinking about getting into the real estate market, or expanding your real estate portfolio, you’ve likely heard the term REIT. A REIT, or Real Estate Investment Trust, is a company that owns or finances real estate properties. You invest in the company that owns multiple income-producing properties. Therefore, you are not the landlord getting 3 AM calls about broken heating or dripping faucets. Someone else handles that. You own, and you collect your dividends without bailing water out of a flooded basement or changing light bulbs on a 20-foot ceiling.

Think of a REIT as being very much like a mutual fund that potentially owns lots of different properties. Like mutual funds, it has managers that take care of them. It’s a way of getting into the real estate market without having to roll up your sleeves and getting directly involved in a property.

On the other hand, think about your own home, or any rental properties you own or have owned previously. Things break and have to be repaired or replaced. Someone needs to handle maintenance. It can be a lot of work to manage an individual real estate property. And it’s a lot of work to manage several properties’ day-to-day needs.

While it sounds like I’m directing you away from individual real estate property ownership, that is not the case. Both individually-owned properties and real estate investment trusts have their own advantages. When your real estate investments are properly managed, they can create the benefits you desire.

So to help you explore REITs as a possible shift in your real estate involvement, or an addition to your portfolio, let’s look at them from the approach of ‘what is right for you.’

Which is better for you: A REIT or a direct real estate purchase?

A REIT lets you be involved in the real estate market without having to actively manage a property. This may work best for you if you:

  • Don’t wish to spend a lot of time and energy fielding calls from tenants about repairs needed to the property.
  • Are not handy.
  • Don’t wish to handle day-to-day scheduling of any repair work or other maintenance issues.
  • Don’t wish to spend a lot of time and energy finding new tenants or handling rental schedules, payment, insurance and more.

In contrast, you may prefer an individual real estate property ownership, if you:

  • Enjoy the process of maintaining a property. You are a handyman and don’t mind getting calls from your tenants about repairs.
  • Are actively part of the trades. This means you personally can handle repairs and improvements. Plus you have contacts with reputable tradespeople who can undertake your property repairs and management, often at a discount.
  • Have plenty of time to handle keeping the rental property booked throughout the rental season. This means getting a real estate agent or rental company, putting the property on the market, showing the property, and marketing its availability.
  • Have plenty of capital and can hire a property manager.

Those are just some of the realities of both options. Do you want to be hands-on, handling the many categories of real estate ownership and rentals? Or would you prefer to have a REIT company handling most of the work for you?

What to consider with a Real Estate Investment Trust

If you favor the latter, here are some things to keep in mind about real estate investment trusts:

  • There are several different kinds of REITs to choose from. These include Equity REITs and Mortgage REITs among others, offering regular income streams, diversification and long-term capital appreciation.
  • REITs pay out dividends to shareholders, who then pay income taxes on those dividends.
  • REITs are located in every state and internationally. You can potentially invest in REITs in over 30 countries around the world without having to actually go overseas to search for properties and endure the rigorous process of international real estate transactions.
  • A board of directors or trustees manage REITs and have a minimum of 100 shareholders. Some are stock exchange-listed REITs and some are private entities. Stock exchange-listed REITs operate under the same securities regulatory and financial reporting rules as other exchange-listed companies.

Those who have REITs included in their investments may diversify REIT types and may choose both domestic and international REITs. REITs give you plenty of options.

So, to simplify, the choice between a REIT and individual property investment is purely a matter of personal choice. You have to know, and accept, your limitations of time, budget, energy, tolerance for risk, and even tolerance for many different kinds of people’s personality types when you deal in rentals and tenants. Know yourself, and know what you may be getting into upfront, no matter which choice you make.

Here two informative podcasts to help guide you through your REIT vs. individual real estate purchase decision-making process. This includes a very important discussion about outright property purchases and the potential risk of winding up with a property that’s worth less than what you invested if housing values or the market tank.