How To Purchase REITs

Real Estate Investment Trusts, or REITs, offer individuals an opportunity to invest in real estate without the complexities of directly owning and managing properties. By purchasing REITs, investors can enjoy a share of the income generated by a diversified portfolio of real estate assets. This guide will take you through the detailed process of purchasing REITs, explore the different types available, and provide you with a thorough understanding of this investment vehicle.

Understanding REITs

Before delving into the buying process, it's vital to understand what REITs are and how they work.

What Are REITs?

REITs are companies that own, operate, or finance income-generating real estate across a range of property sectors. They allow individuals to invest in portfolios of real estate assets the same way they invest in other types of industries – through purchasing securities. REITs typically pay high dividends because they are required to distribute at least 90% of their taxable income to shareholders.

Types of REITs

1. Equity REITs: These invest in and own properties and earn income primarily through leasing space and collecting rents. Most REITs fall into this category.

2. Mortgage REITs (mREITs): These provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. They primarily earn income from the interest on these assets.

3. Hybrid REITs: These combine the investment strategies of both equity REITs and mortgage REITs.

4. Public REITs: Listed on major stock exchanges, these REITs provide liquidity since they're easily traded.

5. Private REITs: Not publicly traded on stock exchanges and therefore less liquid; they often target institutional investors.

Steps to Purchasing REITs

Assuming you have a basic understanding of REITs, let's move on to the practical steps of purchasing them:

Step 1: Define Your Investment Goals

Before investing, establish your financial goals. Consider whether you're seeking regular dividend income, long-term growth, or both. Also, assess your risk tolerance, as mREITs, for example, may be riskier than equity REITs.

Step 2: Research Potential REITs

Conduct thorough research to identify promising REITs. Review their historical performance, dividend yields, and the property sectors they cover. Key research points include:

• Net Asset Value (NAV): It helps in determining whether a REIT is over or undervalued in the market.
• Funds from Operations (FFO): This metric evaluates a REIT's cash generation capacity, a better measure than net income.
• Dividend Sustainability: Study the REIT’s history of paying and increasing dividends as an indicator of stability.

Step 3: Choose the Right Platform

Investors can buy REITs through various platforms. Here’s a comparison table that outlines different options:

Step 4: Open an Account

If you choose an online broker or investment fund, opening an account is relatively easy:

1. Sign Up: Provide personal information and complete the broker's application process.
2. Fund Your Account: Transfer funds from your bank to the brokerage account.
3. Navigate the Platform: Familiarize yourself with the broker’s platform and available tools.

Step 5: Make the Purchase

After deciding on a specific REIT or fund:

1. Enter Order: Navigate to the REIT section, select the desired REIT, and enter the quantity you wish to purchase.
2. Select Order Type: Decide on a market order (buy at current price) or limit order (buy at a specified price).
3. Review & Confirm: Double-check the details and execute the trade.

Step 6: Monitor Your Investment

Once you own REITs, regular monitoring is important. Keep an eye on:

• Market Trends: Real estate trends, interest rates, and economic conditions can influence REIT performance.
• Performance Metrics: Regularly check NAV, FFO, and dividend changes.
• Reinvestment Options: Consider reinvesting dividends to maximize growth, using an automatic dividend reinvestment plan (DRIP).

Addressing Common Questions & Misconceptions

Are REITs Risk-Free?

REITs, like any investment, carry risks such as market risk, interest rate risk, and sector-specific risks. Diversifying across several REITs and sectors can mitigate some risks.

Can REIT Investments Be Taxed?

Yes, dividends from REITs are typically taxed as ordinary income. However, the Tax Cuts and Jobs Act allows for a pass-through deduction that may enable investors to deduct up to 20% of REIT dividends.

Is There a Minimum Investment?

Publicly traded REITs on stock exchanges generally have no minimums and can be purchased as individual shares. Private and non-traded REITs often require higher initial investments.

Enhancing Your REIT Strategy

Explore Different Sectors

Investing in various property sectors such as residential, commercial, or industrial can diversify and potentially enhance your portfolio's resilience.

Consider Market Conditions

Stay informed on macroeconomic factors. For instance, low-interest-rate environments might benefit REITs since businesses often seek lower borrowing costs for expansion.

Further Reading

For those eager to explore more, consider reputable sources like:

• National Association of Real Estate Investment Trusts (NAREIT)
• Investopedia’s in-depth guides on REITs
• Fidelity’s REIT education materials

Conclusion

Purchasing REITs can be a rewarding venture for those looking to invest in real estate without the direct hassles of property ownership. By following the outlined steps and remaining informed, you can strategically position yourself to capitalize on the income-generating potential offered by REITs. As with any investment, it's crucial to align your decisions with your financial goals and risk appetite. By staying engaged with market trends and utilizing diverse sectors, REITs can augment your investment portfolio effectively. Don't forget to delve deeper into related resources for a comprehensive understanding and leverage your new insights in making informed investment decisions.