A primer into the basics of REIT to ensure that you do not miss that opportunity when it comes knocking on your door.

As an evergreen and sustainable approach for most investors, real estate has been a prominent addition to portfolios for a long time now with various financial products and solutions to choose from when considering property investment options.

REITs or Real Estate Investment Trusts are one such popular option. Here’s a basic guide on what REITs are, how they work, and whether they might be part of a suitable strategy for your investing milestones.

What is a REIT?

A fund or trust known as a real estate investment trust (REIT) owns and oversees commercial real estate that generates revenue (shopping complexes, hospitals, plantations, industrial properties, hotels, and office blocks).

A REIT’s management business is allowed to deduct shareholder distributions from its corporate taxable income. However, in order for the REIT to benefit from this tax-free status, the majority of its assets and income must be related to real estate, and it must distribute at least 90% of its total income to investors and unit holders yearly.

They are based on mutual funds, combining the capital of many investors and letting individual investors benefit from income derived from real estate investments without having to invest in, manage, or finance any real estate themselves.

Types of REITs.

Below are the three type of REITs that will help you determine which type suits you more.

#1. Mortgage REITs

Mortgage REITs provide money to property owners and managers directly through mortgages and loans, or they do it indirectly by buying securities that are backed by mortgages. What ultimately drives their earnings is the net interest margin, which is the difference between the interest they receive on mortgage loans and the cost of funding these loans. This model suggests that they might be vulnerable to rising interest rates.

#2. Equity REITs

Most REITs are equity REITs, which own and operate properties that generate income. Rent is the primary source of income (not reselling properties).

#3. Hybrid REITs

Both equity, as well as mortgage REIT investment strategies, are used by these REITs.

Core differences:

– Equity REITs acquire and manage real estate assets that generate revenue.

– Mortgage REITs are the owners of mortgages on real estate.

– Hybrid REITs combine the traits of equity and mortgage REITs by owning real estate and holding mortgages.

How to Invest in REITs

Follow these steps to start investing in REITS.

Step 1: Select a brokerage company

Look through the Bursa Malaysia website to choose a dependable brokerage. Pay attention to the commission costs, convenience of transactions, compliance with Syariah, and user-friendliness of the broker’s preferred online trading platform.

Step 2: Create a CDS account and a trading account

Make an appointment to open these accounts with the broker you chose. Usually, you will be required to submit paperwork, including copies of your identification and bank statements. You’ll receive instructions on using the online trading platform from your broker as well.

Step 3: Fund your trading account

Opening an account takes a few days. After activating your account, you can start adding money to the online trading platform. Fund your account in accordance with your financial situation.

Step 4: Start investing!

If you have enough money in your trading account, you may now use the online trading platform to begin investing in REITs.

The Pros and Cons of Investing in REITs

Due to their potential for providing a solid, consistent annual dividend as well as the possibility of long-term capital growth, REITs can be a significant part of an investment portfolio. Over the past 20 years, REIT’s total return performance has exceeded that of the S&P 500 Index, other indices, and inflation.

REITs have benefits and drawbacks, just like other investments.

On the plus side, REITs are simple to buy and sell because they often trade on public markets, which helps to offset some of the traditional real estate problems. REITs deliver consistent cash flow and alluring risk-adjusted returns in terms of performance. Additionally, a real estate holding can benefit a portfolio since it offers diversification and dividend-based income, and the payouts are frequently bigger than those you might get from other investments.

REITs have the disadvantage of not offering much in the way of capital growth. They are required by their organisational structure to return 90% of income to investors.

Some REITs have substantial management and transaction fees, and REIT dividends are taxed as normal income.

When it comes to REITs, you might have some information on how to move forward, but none of it gives you the whole or final picture by itself. Furthermore, the information could be inconclusive, with one valuation metric showing that the REIT is underpriced and another that it is costly.

Gather all the data and weigh the advantages and disadvantages. Finding a REIT that performs exceptionally on every test is uncommon. For instance, the REIT may have a greater debt-to-EBITDA ratio than you would like to see in addition to a high-interest coverage ratio. The higher leverage may just be a part of the company’s strategy given that it has maintained the same level of debt for many years while growing its worth.

You must take into account all of the metrics at once to see how they all fit because each one only contributes a small amount to the total picture.

Utilise Your Intuition

When explaining how to analyse a REIT, one aspect that most experts skip over is the use of intuition.

Even though all the statistics seem to be good, the management’s growth expectations may leave you perplexed. Or perhaps you disagree with the level of demand that industry insiders believe will exist for a particular type of property in the upcoming years.

Making better REIT investment decisions may be possible for you if you use this knowledge and continue your research to increase the value of your investment portfolio.

Conclusion

REITs offer an opportunity for individual investors to benefit from income generated by real estate investments without having to manage, finance or invest in any property themselves. While they can provide a consistent annual dividend and diversification benefits, they also come with drawbacks such as limited capital growth and management fees.

Before investing in REITs, it’s important to research and evaluate the options carefully, consider all the relevant metrics and use intuition to make informed decisions. With the right approach, REITs can be a valuable addition to an investment portfolio.

 

What are your thoughts on having REITs in your investment portfolio? Let us know in the comments below.

 

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