When constructing an equity or fixed-income portfolio, real estate investment trusts (REITs) have known to provide the investors with greater diversification, higher total returns and lower risks. In general, REITs manage income earning commercial real estate in accordance with the government regulations to disburse 90 percent of its profits among its shareholders. REITs both may directly or indirectly hold the ownership of such real estate and will provide the small-scale investors an opportunity to enter into real estate investing which otherwise would be impossible to achieve.
There are many companies involved in managing REITs and there are several types of REITs available to a potential investor. However, one needs to understand the differences between at least the main REITs available in the investor market and this article hopes to shed light to five main types of REITs which should be considered by a potential investor.
According to industry analysts, around 24 percent of REIT investments are in shopping malls and other freestanding retail. In most instances, a retail enterprise may be part of a REIT. However, when making an investment decision, one should assess the viability and the future of a particular retailer and the REIT itself. The reason being that, the poor sales income by a retail enterprise and therefore the inability to pay the rental may directly affect the dividends paid by the REIT. Thus, market trends will greatly affect the ability of a retailer to meet the rental cost and therefore the investors’ ability to receive dividends from the REIT.
This type of REITs own and manage apartment complexes and manufactured houses and in most instances it earns through the rentals. Thus, the investor needs to look into the REITs ability to attract potential tenants and the ability to keep the rental prices at a relatively higher rate than most other markets. In general, biggest residential REITs tend to aim at larger urban centers because the demands for apartments in these areas are more as a result of high cost of individual homes. At the same time, the population growth and the job market are also important parameters to consider before making a decision to invest in residential REITs.
Due to the ongoing debate on where should the funding be generated for healthcare in the US, healthcare REITs have become somewhat unstable as they rely on the occupancy fees, Medicare and Medicaid reimbursements and some private pay. However, due to the rising health costs, such REITs usually do not perform badly when it comes to dividends pay and therefore should be a sound investment in most instances.
These funds look after real estate related to office buildings. Thus, they are affected by the economy, the unemployment rate, the location etc. However, in order to make the best out of office REITs, one should look for REITs, which has invested on economic strongholds in the country.
Apart from equity investment, REITs are also involved in investing in mortgage as in the case of Fannie Mae and Freddie Mac both of which are government sponsored investment organizations. In general, a REIT may have around 10 percent of their investments on mortgages. However, it does have its own drawbacks and one such instance is when the interest rates rise, the mortgage REIT book value could go down along with the stock prices.
The five types of REITs described in the article can be considered the most common types of REITs available for investor consideration although depending on the investor interest and the market trends, certain other types of REITs may draw attention in the ever-changing investor market.