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Here Is How To Invest In Real Estate Through a REIT. BUT Is There A Better Option?
Real estate investment trusts (REITs) are investment vehicles that allow individuals to invest in a diversified portfolio of real estate assets without directly owning or managing properties themselves.
A REIT is a company that owns and operates large-scale income-producing properties such as office buildings, shopping malls, apartments, hotels, industrial facilities, and other types of commercial real estate. Unlike other real estate companies, REITs do not develop real estate in order to resell them. They buy and develop properties to add them to their investment portfolio. [1]
This approach gives investors exposure to the real estate market without the hassles of owning a real estate property. With REITs, investors can earn income through dividends and capital appreciation.
One of the key characteristics of REITs is that they are required by law to distribute a significant portion of their income to shareholders in the form of dividends. In return for this mandate, REITs are able to avoid corporate income tax at the entity level, making them tax-efficient investment vehicles.
For income-oriented investors, this dividend distribution requirement makes REITs an attractive option.
REITs are also traded on major stock exchanges, meaning investors can benefit from liquidity. Compared to direct real estate ownership, it is easier to buy and sell shares with REITs. Here we will discuss how investors can invest in REITs and make the most out of it.
Why Invest in REITs?
The main appeal of investing in REITs is the ability to gain exposure to the real estate market without the challenges that come with owning a physical property.
That said, there are several other compelling reasons to consider investing in REITs. By law, REITs have to distribute at least 90% of their taxable income to shareholders in the form of dividends. This can result in potentially higher dividend yields compared to other stocks. The steady income stream investors get from REITs can serve as a valuable source of passive income.
REITs offer a strong, stable annual dividend and the potential for long-term capital appreciation. In fact, for the last 20 years, REITs total return performance has outperformed the S&P 500 Index, other indices, and the inflation rate. [2]
As a real estate investment, REITs also offer diversification benefits to investment portfolios. This is because real estate has low and sometimes even negative correlation with stocks, bonds, and other asset classes. Adding REITs to your investment portfolio can help reduce volatility.
Additionally, REITs can provide exposure to different sectors of the real estate market, such as residential, commercial, industrial, and healthcare properties. Investors are able to diversify across various segments of the economy.
This diversification can help mitigate risks associated with any single property or sector downturn, making REITs a valuable component of a well-rounded investment strategy.
Do Your Research
While investing in real estate through real estate investment trusts can be a relatively straightforward process, investors still need to do their due diligence.
It is crucial to conduct thorough research to understand the nuances of this investment vehicle. Firstly, prospective investors should know what REITs are and how they work. Next, you can begin to familiarize yourself with the different types of REITs available, such as equity REITs, mortgage REITs, and hybrid REITs. These may have varying risk profiles and potential returns.
Researching the specific REITs themselves is also essential. Look into the quality and diversity of the underlying real estate assets, as well as the track record and expertise of the management team. A good management team can upgrade the facilities and enhance the services of an underutilized building to increase demand. [3]
Look for growth in earnings. This stems from higher revenues, lower costs, and new business opportunities. Higher revenues mean higher occupancy rates and increasing rents. [3]
By conducting comprehensive due diligence, investors can make informed decisions and select REITs that align with their investment objectives and risk tolerance.
Learn About the Different Types of REITs
There are several types of REITs out there, including equity REITs, mortgage REITs (mREITs), and hybrid REITs. Understanding the different types of REITs will help you make better investment decisions based on the type of properties they invest in and how they generate income.
Equity REITs
These are the most common type of REITs. Equity REITs invest in and own income-producing real estate properties. Their primary source of revenue comes from rents collected from tenants of the properties they own. [2]
Equity REITs can specialize in various types of properties such as residential (apartment buildings, single-family homes), commercial (office buildings, retail centers), industrial (warehouses, distribution centers), and mixed-use properties.
Mortgage REITs (mREITs)
Unlike equity REITs, mortgage REITs do not own physical properties. Instead, they invest in real estate mortgages or mortgage-backed securities.
Mortgage REITs generate income primarily through interest earned on the mortgages they hold or by investing in mortgage-backed securities. Take note that they can be further classified into residential mortgage REITs and commercial mortgage REITs, depending on the type of mortgages they invest in. [2]
Hybrid REITs
These REITs combine elements of both equity REITs and mortgage REITs. They typically own and operate real estate properties while also investing in real estate loans or mortgage-backed securities. Hybrid REITs aim to diversify their revenue streams by generating income from both property rents and interest from mortgage investments. [2]
REITs can be further classified based on how their shares are bought and held. There are publicly-traded REITs, private REITs, and public non-traded REITs.
Publicly Traded REITs
Listed on stock exchanges, publicly traded REITs can be bought and sold in a similar way to stocks. By being easily traded, they can provide liquidity for investors. Most equity REITs are publicly traded. [2]
Private REITs
Private REITs are not traded on public stock exchanges. Instead, they are typically offered through private placements or limited partnerships. Private REITs may offer less liquidity compared to publicly traded REITs but may provide higher potential returns.
Public Non-Traded REITs
While public non-traded REITs are also registered with the SEC, they do not trade on national securities exchanges. This means compared to publicly traded REITs, they are a lot less liquid. However, they are not subject to market fluctuations. This is why they tend to be more stable. [2]
These are some of the main types of REITs, each offering investors different opportunities for diversification, income generation, and potential returns. It’s essential for investors to understand the specific characteristics and risks associated with each type of REIT before investing.
Evaluate the Performance and Prospects of REITs
Another crucial step for investors looking to participate in REITs is evaluating the performance and prospects of their prospective REIT.
By examining factors such as dividend yield, total return, and share price performance over time, investors can gauge the profitability and stability of investing in REITs compared to other asset classes.
Yield is related to the growth prospects and risk potential of a REIT. Therefore, it is one of the main metrics used by investors seeking dividends. By taking the distribution or dividend per unit in a REIT paid to investors divided by its current unit price, you can calculate its historical yields. [4]
Understanding past performance provides valuable insights into how REITs have weathered different market conditions and economic cycles, helping investors assess their risk-return profile and suitability for their investment objectives.
Choose and Open a Brokerage Account
To begin investing in REITs, investors need to choose a brokerage account. There are various online brokerage platforms available, each offering different features, fees, and investment options. It’s essential to research and compare different brokerage firms to find one that aligns with your needs. [5]
Once you’ve selected a brokerage account, the next step is to open an account with them. This typically involves providing personal information, such as your name, address, social security number, and employment details. [5]
You will need to fund your account with the amount of money you intend to invest in REITs. After your account is approved and funded, you can start browsing for available REITs.
Identify the REITs you want to invest in and place buy orders for the desired number of shares through your brokerage account. Specify whether you want to buy shares at the current market price or set a limit order at a specific price. [5]
Regularly monitoring your investments and staying informed about market trends can help you maximize your returns over time.
If you’re unsure about which REITs to invest in or how to build a diversified real estate investment portfolio, consider seeking guidance from a qualified financial advisor.
Consider Multifamily Syndication
No investment is without risk, so investors should keep in mind that even REITs have their drawbacks. See our previous article, REITs vs Multifamily Syndication.
One significant downside is the dependency of REITs on interest rates. Since REITs are often seen as income-generating investments, they are sensitive to changes in interest rates. When interest rates rise, the cost of borrowing for REITs increases. This can negatively impact their profitability.
Additionally, since investors are investing in the REITs themselves, they cannot choose which real estate properties to invest in. It is up to the REIT to decide which investment properties to invest in.
For accredited investors who desire a hands-off approach in real estate investing but prefer to choose which investment property to pour their capital into, multifamily real estate syndication is a great alternative to REITs.
Real estate syndication is a type of passive investment in real estate. It involves several investors pooling their funds together in order to buy a single property.
This type of deal can be done with any real estate property, but multifamily properties are the most commonly used. This is because multifamily properties like apartment communities and condominiums are associated with strong and consistent cash flow, thanks to their multiple units.
Multifamily syndication is also the most popular because these properties are generally larger, more expensive, and more difficult to acquire for a lone investor. The syndication is designed to make these investment properties more accessible for investors. [6]
A syndicator arranges the deal and takes on the role of general partner (GP). Also known as the sponsor, this syndicator takes on most of the responsibilities in the syndication. They are the ones to create and execute the business plan. They are also the ones to locate the investment property, secure the financing, and look for real estate investors who will join the syndication deal. [6]
Meanwhile, as limited partners (LPs), investors have limited responsibilities and liabilities in the syndication deal. They will only provide most of the capital needed to acquire the property. They may also pay certain fees needed for the syndication. Beyond that, there’s no further input required from them. The syndicator will be the one to handle everything—even property management.
The difference between this and REITs is that you can actually choose which syndication deal to participate in based on the investment property being offered. Being part of a syndication also means that you own a percentage of that property.
But because the syndicator will handle property management, this is a true passive investment in real estate.
For your investment, you will receive a share of the property’s monthly cash flow. Depending on the deal structure, you may also receive a percentage of the equity upon resale. However, every deal is different, and investors still need to do their due diligence before agreeing to participate in a syndication deal. [6]
Keep in mind that most of these deals are exclusive to accredited investors—individuals who fit certain financial and professional criteria set by the US Securities and Exchange Commission (SEC), allowing them to participate in unregistered securities.
Accredited investors have the financial safety net needed to protect themselves in case certain investments do not work out. They also have the experience and investing knowledge necessary to assess investments that are not available to the general public.
Overall, multifamily syndication is a type of passive investment in real estate that lets you avoid the headaches of being a landlord.
Multifamily syndication makes real estate more accessible to accredited investors. It helps investors diversify their investment portfolios with larger real estate properties. Investors can even benefit from the syndicator’s professional management expertise.
If you are an accredited investor looking to add real estate to your investment portfolio, consider looking into multifamily syndication.
Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals
If you are considering multifamily syndication, you should work with BAM Capital. BAM Capital is an Indianapolis-based syndicator trusted by accredited investors because of its consistent and reliable track record for excellence.
Because the GP will be making all the decisions moving forward, working with a trustworthy syndicator is very important.
Known as an industry leader, BAM Capital’s award-winning investment strategy allows them to mitigate investor risk while creating forced appreciation. This is why they already have over $700 million AUM and 5,000+ units. [7]
BAM Capital also prioritizes high-quality multifamily properties with proven upside potential and in-place cash flow, particularly those that are Class A, A-, and B++.
Being a vertically integrated company also allows BAM Capital to handle every step of the syndication process, from acquiring the multifamily property to renovating and managing them. [7]
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.
[2]: https://www.investopedia.com/terms/r/reit.asp
[3]: https://www.investopedia.com/articles/investing/040215/key-tips-investing-reits.asp
[4]: https://www.dbs.com.sg/personal/articles/nav/investing/evaluating-reits
[5]: https://www.investopedia.com/articles/mortgages-real-estate/10/real-estate-investment-trust-reit.asp
[6]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important
