Diversifying Your Investments - REITs & REIT ETFs
Investors and firms have been developing new methods to allow individuals to participate in large-scale, income-producing real estate during the last decade, as property investment strategies have evolved. A REIT is a firm that owns and operates income-producing real estate or associated assets. Apartments, hotels, office buildings, malls, resorts, warehouses, and mortgages or loans are examples of these. The most significant advantage is the diversification that REITs bring to your portfolio. In comparison to other strategies, they are a sensible investment option due to the possibility for significant returns and lower total risk. REITs are a fantastic choice because of their capacity to offer dividend income as well as capital appreciation. REITs have historically been one of the best-performing asset groups. According to Nareit and Slickcharts, the total annual return for REITs over the last five years has been 9%. This is greater than most average yields in the UK, demonstrating that REITs are a property investment powerhouse.
There are various requirements set by the IRS that a company must meet to qualify as a REIT:
· Invest at least 75% of its total assets in real estate
· Obtain at least 75% of its total revenue from sales of real estate, interest on mortgages financed by real estate, or rents from real estate.
· Pay at least 90% of its taxable income in the form of shareholder dividends each year
· Have a minimum of 100 shareholders
· Have no more than 50% of its shares held by five or fewer individuals
There are various types of REITs, and we will focus on five of them in this article:
Retail REITs: Similar to HMOs, these own and operate retail real estate and rent space in those properties to tenants. Retail REITs are concentrated in big regional malls, outlet centres, shopping malls, and power centres. Most retail REITs use gross leases, in which the tenant pays a fixed monthly rental rate based on the number of square feet leased in the property. Triple net leases are employed by REITs focused on freestanding retail buildings. The tenant is responsible for building insurance, real estate taxes, and building maintenance in addition to the base rental amount. Retail REITs can provide relatively steady cash flows thanks to this structure. E-Commerce is a primary driver of retail REITs, customers have the ability to purchase online but the majority still shop in physical stores. Therefore, places such as pharmacies, home improvement stores, and supermarkets continue to thrive, benefitting retail REITs.
Residential REITs: These REITs are the most similar to HMOs and PBSAs. Residential REITs specialise on apartment complexes, student housing, prefabricated houses, and single-family homes. Residential REITs give out dividends to shareholders on a regular basis. The size and timing of these payments are determined on the REIT's performance and the payment schedule established by the REIT. The key to profiting from residential REIT investments is to pick regions with a developing economy and a high demand for unit supply.
Healthcare REITs: This subsector is worth keeping an eye on because the success of this REIT is directly related to the healthcare system. Healthcare REITs are companies that invest in the real estate of hospitals, medical centres, nursing homes, and retirement homes. These facilities are mostly supported by occupancy fees and private payments. The most important characteristic of healthcare REITs is their reliance on healthcare funding. Increased demand for healthcare services will drive the success of healthcare REITs. Seeking companies with considerable healthcare experience and minimal capital costs could be a worthwhile investment.
Office REITs: These invest specifically in office buildings and earn rental income from tenants who often sign long-term leases. Skyscrapers and office parks are examples of such properties. Office REITs typically target a certain market, such as business districts or suburban areas. Choosing an economical powerhouse as a site is an efficient method to invest in office REITs.
Mortgage REITs: These are referred to as mREITs. They are critical to the real estate market's liquidity. Residential and commercial mortgages, as well as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), are common investments for mREITs. The primary goal of mREITs is to profit from their net interest margin, or the difference between interest revenue on their mortgage assets and funding costs. Because rising interest rates cause a drop in mortgage REIT book values, mREITs are one of the riskier REITs to invest in.
When analysing a REIT, look for companies that have a history of paying out high dividend rates while also generating respectable long-term capital appreciation. The most appealing characteristic is that many REITs are publicly traded, allowing you to manage your portfolio freely rather than being locked in for the long term. This gives you a lot of flexibility in your portfolio, allowing you to invest in many various markets while studying others. The majority of REITs likewise follow a very plain and simple business model. REITs have typically given inflation protection, giving your investment a sense of stability. Realty Income is now the fastest growing REIT. This is a real estate investment trust that owns and operates commercial buildings in the United States and Europe. Realty Income considers assets with the purpose of paying dependable monthly income. They recently reported Q2 2022 results, revealing that net income available to shareholders increased by 79.3% year on year. Based on its current growth, this would be an excellent REIT to buy in right now.
REIT exchange traded funds (ETFS) differ from REITs in that their assets are predominantly invested in equity REIT securities and other derivatives. They frequently have low expenditure ratios and monitor indexes for the wider real estate market passively. An investor can acquire exposure to the greater real estate market by tracking an index rather than risking funds on a single company. REIT ETFs are intended to emulate REIT indices. While it may appear that they are concentrated on the biggest REITs, these REITs have a track record of functioning effectively and generating revenue. Overall, REIT ETFs are a hybrid product that combines mutual fund diversity with the opportunity to purchase and sell shares on a major stock exchange.
The asset selection of REITs and REIT ETFs differs significantly. REITs frequently perform extensive study before purchasing a single property, which is repeated for each investment opportunity. REIT ETF purchasing strategies differ because many of them use a market weight technique, which simply means they acquire REIT shares based on their market cap. Another key advantage of REIT ETFs is diversification. While REITs diversify their portfolios by owning a variety of properties, REIT ETFs go even farther by owning a number of REITs from diverse property sectors. With a cost ratio of around 0.12%, Vanguard Real Estate ETF is currently the best performing REIT ETF. This is less than half of the industry average of 0.24%, allowing investors to keep more of their money.
Novyy is a Community Investing Platform that enables individuals to invest in UK Buy-To-Let, Leading Real Estate Private Equity Funds, and Premium Homes across Europe with as little as £10,000. Novyy users enjoy seamless digital investing like never before, in opportunities that were earlier unavailable to most individuals. This piece should not be construed as tax advice. Please refer to your tax advisor before making any decisions on owning properties through Limited Companies.