Finding the most advantageous markup in the world of investment denotes a certain browsing market for opportunities. The fact that, at any given moment, an investment can make or break your bank means that even the most appealing bids could spell disaster. That’s a part of the excitement of being an investor, the ball of the game.
If you’re the sort of person who plays on the line, reaping in reward based on chance and gumption, that’s commendable. However, for the most part, the main source of investment revenue for the rest of us comes from reliable sources. What can we back safely while promising decent returns for our efforts? We certainly can’t all wager our bets on volatile bubbles like cryptocurrency. An investment hinged on real estate has proven a valuable resource for investors. Building a base centered on income-producing real estate is pivotal to constructing a solid portfolio for profit. That being said, the best fixture for real estate income, without forcing you to personally manage and accrue real estate on your own behalf, would be through using a real estate investment trust or REIT.
What Is a REIT?
REITs are companies that provide the means to invest in income-producing real estate properties. In order to cash in on these investments, it involves obtaining stocks and becoming a holder in these companies. From here, the process becomes fairly simple as far as earning money goes. As the REIT collects on income, via rents and leases on their owned properties, they then provide compensation for their investors.
The compensation comes in the form of dividends, which REITs are required to divvy out 90 to 100%. This results in the company, as a whole, being able to retain its status via tax exemptions and profits through paying their shareholders. The system as a whole pays off well for all involved, and is regarded as one of the highest, steadiest paying investment opportunities on the market.
Where Does the Income Come From?
The stability of a REIT stems from its ability to cater to both small and large investors. The prime income is derived from the tenants who reside in these properties owned by a REIT. The rent and leasing income then is distributed to the shareholders. By providing such a large output, investors are able to receive high dividends while maintaining long-term appreciation.
People always need somewhere to live. It’s precisely by capitalizing on the housing market that provides sustainability for all types of investors. REITs provide staples for comfortable and consistent revenue that other investment opportunities might not.
Now, when it comes to investing in REITs, there are several options you can choose from. When it comes down to it, REITs only come in two categories: equity and mortgage. Your preference is basically on what sort of investment you want to focus on, whether you want something that’s more volatile but delivers on better profits or an investment for the long-term.
With equity REITs, you’re going to be investing in physical properties. Due to the nature of REITs, you won’t actually shell out any money to personally own real estate. Instead, your support is founded on primarily rental incomes. This will also include any acquisition, management, renovation, selling, or other such responsibilities of the aforementioned properties. Since equity REITs cover physical assets, their values are more manageable as well as fiscally flexible to maintain. These sorts of REITs cover office spaces, houses, retail, and most any other sort of structural space. They make up about 90% of the real estate market, making them the most common form of REIT.
By comparison, mortgage REITs are less focused on physical real estate and focus more on the payment aspects. As their name suggests, mortgage REITs are only relevant in regards to mortgages. Since they aren’t as plentiful or commonly traded as physical real estate, a REIT of this sort makes up a fraction of the market. If the former, REIT covers the tangible real estate properties that people pay money to use, the latter focuses on profiting off of the deals that provided them the means for their purchase. Mortgages are loans given so that everyday folks can afford to live in houses. While certainly not limited to simple houses, and can be applied to plenty of other spaces, a mortgage is a mortgage. The longer a mortgage exists, the more interest will be applied for their recipient to pay off. The function of a mortgage REIT is to profit off of this interest. By purchasing a share in mortgage REIT, you gain a much stronger leverage in the market than with an equity REIT. However, since it’s more powerful, with a leverage of 5:1 as compared to an equity REITs of 2:1, it’s much more volatile and risky.
What Are the Average Returns You Can Expect?
The reason why REITs are so popular are due to their high value and return. With provided immediate dividends, supplemented with long-term security, what matters next is having an understanding of what to expect. Most importantly, the question will probably be on the tip of your tongue: what will the average returns be?
The average returns will, of course, be dependent on a variety of circumstances: what sector you’re involved in, what sort of REIT you’ve invested in, and so on. They’re wont for fluctuation, like any other stock-based company. However, as REITs are for the moment somewhat undervalued and overlooked on the market, there’s been steady growth.
An Upward Trend
Since the housing collapse in 2008, the REIT market has been undergoing slow but steady rebuilding. After the bubble broke, and the REIT market bounced back, we’ve been steadily making our way toward better and better returns on investments. As of now, the market is seeing positive returns, climbing a yield of 0.29%. For every investment you make, the goal is making that investment worth more in the long run. If you buy stock for $100 and sell it for $200, then that’s a return of $100 to you. If you’re planning on investing now, the market is looking healthy. For your total returns, you’ll be looking at a 22.6% increase in value on your REIT. So far, the market since the 2008 collapse has been showing signs of growth, so it’s looking like it’s going to go up in 2019 as well, though it may not be a drastic change. However, that’s only covering the total return, and may not be indicative of what you personally will be receiving.
Looking at the Average Return Rate
What’s important to keep in mind is what the average return will be. While 22.6% is indicative of the market as a whole, the average return tells a slightly different story. In the real estate investment market, REITs are actually the best performing out of all competing fields. The average annual return on a REIT has proven to be about 10%, staying consistent for the past decade. This high average return rate carries a certain amount of security with investing in REIT. It’s derived from the average of the past ten years of total annual returns. Though ten years ago was among the lowest the REIT market had been, its testament to an expanding and strengthening market is evident in its average return rate.
Should You Invest in a REIT?
Considering the strength and continual growth of the market, REITs are and have been considered a safe bet for years. With pronounced high return and consistent long-term incomes, the result is a reliable investment. However, though the REITs themselves aren’t subject to certain taxes due to the nature of their structure, they still are taxed. It’s not a perfect system, but it works well. You’ll still be required to file taxes based on your REIT dividends, but the benefits outweigh the cons in the long run. REITs provide an easy way to manage, sell, and purchase real estate properties without being forced to own the properties yourself. It’s a form of financial security, allowing you to gain profit with reduced risk. All that’s left is to decide which kind of REIT is what you’re looking for.