other ways to invest in real estate
Maybe you don’t have $100,000 or the credit to get a loan on an income property, but lone behold, there is a way to invest in real estate still. There is a thing called a real estate investment trust (REIT), which is a company that holds, operates, or finances income-producing real estate. They are traded like other stocks on many major exchanges like the New York Stock Exchange. Investing in these gives you, the investor, a liquid stake in real estate.
REITs are very similar to mutual funds, as they have a diverse number of holdings within them. When investing in these you then possess ownership in real estate ranging from commercial real estate portfolios that generate income from different types of properties. Types of holdings include:
Most REITs are sector based such as an Office Building REIT or a Warehouse REIT. How do you make money from REITs? Well just like a stock, if the price rises your investment is worth more and they also feature dividends. The dividends in most cases are determined by the money received on rental payments and divvyed up to its investors at a percentage rate.
How does a company become an REIT? Here’s a few of the requirements:
Must invest 75% of its total assets in real estate, cash or U.S. Treasuries
Must receive a minimum of 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
Must pay a minimum of 90% of its taxable income in shareholder dividends each year
Must be managed by a board of directors, like most publicly-held companies
Must have at least 100 shareholders
What are mortgage REITs?
Unlike those equity REITs, mortgage REITs are very different and a lot riskier. With mortgages, interest rates are constantly changing which make the value of the REIT susceptible to volatility. If the mortgage interest rates spike, it’ll tighten up the spread of which the REIT can borrow money at and will greatly decrease the profit it. If the mortgage REIT buys 30 year mortgages that pay 5% and can borrow money at 3% that leaves a good 2% spread at which the REIT profits which will result in your dividends. If interest rates jump up to 5% to borrow money then the REIT is no longer making profit as it’s breaking even.
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