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REITs: Buying Real Estate without Large Amounts of Capital

Posted By Miranda Marquit On 08/30/2012 @ 12:10 pm In Investing | 6 Comments

Even after the recent real estate market crash (and perhaps because of it), there are plenty of people still interested in investing in property [3]. However, many of us don’t have the capital available to buy up real estate. Additionally, considering the financial situation that many find themselves in as a result of the financial crisis, it might not be feasible for many ordinary investors to borrow enough to buy real estate.

For those who are interested in real estate, but don’t have the capital, or those who think that buying actual property isn’t the best investment [4], there is another option. It’s possible to invest in Real Estate Investment Trusts.

What are REITs?

Real Estate Investment Trusts (REITs) are actually securities. They sell like stocks on major exchanges, even though they are actually collections of different investments. In a way, it is sort of like investing in a fund made up of real estate assets, although the trust structure is a little different. There are different options when it comes to investing in REITs:

  • Equity: These types of REITs own and invest in actual properties. Revenues/returns come from the rents that owners receive from the properties. Equity REITs are responsible for the value of their assets.
  • Mortgage: When you invest in a mortgage REIT, you are choosing a security that is related to mortgages. The REIT owners lean money to those that own real estate, or they purchase mortgages and mortgage-backed securities. Your returns come from the interest generated from the property loans.
  • Hybrid: As you might imagine, these are REITs that include both types of real estate investments.

It’s also possible to choose REITs that specialize in certain types of property, such as commercial or residential. Because REITs can be traded on stock exchanges, they are quite liquid. You can get the benefit of adding real estate assets to your investment portfolio, but without the illiquidity and large capital requirements that come with actually buying property on your own. REITs are ideal for those who wish they could invest in real estate, but don’t have the means to buy a rental property.

REITs and Dividends

It is also worth noting that their structure requires that REITs pay a very substantial portion of their profits back to investors in the form of dividends [5]. So, if you are interested in earning a little extra, in the form of dividend payouts, REITs can provide you with an interesting option. It’s possible to use REITs in your dividend income portfolio, helping you create a passive income stream down the road.

You do need to be careful, though. As with all investments, there is the risk of loss. Since you are exposed to real estate investments, you are also exposed to the ups and downs that can come with the real estate market. If there is another crash, or if a number of defaults take place in a mortgage REIT, you sustain losses. You will need to assess the situation, and your risk tolerance. Make sure you understand the risks and rewards associated with REITs before you invest.

(Photo: Images_of_Money [6])


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[3] investing in property: http://www.bargaineering.com/articles/guide-to-real-estate-investing-introduction.html

[4] buying actual property isn’t the best investment: http://www.bargaineering.com/articles/why-i-dislike-real-estate-as-an-investment.html

[5] dividends: http://www.bargaineering.com/articles/why-you-should-be-reinvesting-dividends.html

[6] Images_of_Money: http://www.flickr.com/photos/59937401@N07/5929467651/

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