The Real Estate Investment Trust (REIT) was first made popular in this country, before moving on to Australia and Asia and now making its way to the United Kingdom and the rest of Europe as well. However, not everybody knows what a REIT is, and what sets them apart from other forms of investments. This is what Al Hartman wants to explain.
Al Hartman Defines the REIT
- The REIT construction was first made possible in 1960 by the U.S. Congress in order to enable everyday individuals to invest in huge commercial real estate. It has since been copied the world over.
- The REIT holds a real estate portfolio in which different properties are held. As such, it is similar to a mutual fund. Money is made through the rental income on those properties, selling the properties, or charging interest on mortgages.
- By law, a REIT has to provide its shareholders with at least 90% of its taxable income. These dividend payments enable it to pay almost no income tax, if any.
The REITs Go Global
The REIT market in both this country and Australia is very mature. In fact, they are found in some 95% of property markets in all areas from Houston to Los Angeles. The Asian and European markets are emerging, where between 27% and 15% of the market is capture. This means people still have to build a little faith in the proposition a REIT makes, but progress is being seen.
REIT Stocks vs Property Company Stocks
- They are more tax efficient because they pay almost pay no income tax because of the mandatory payout policy.
- They offer diversity because they are comprised of hundreds of different investments in properties, rather than just a few stocks as seen on a single A4 photo page.
- They offer a stable income, which made up mainly of rent. This means there is less volatility as well.
- Their growth potential is not as big. Due to the payout policy, a REIT does not accumulate capital to invest in new properties. This means that if the market suddenly booms, there is little they can do with that.
REIT Stocks vs Non-Property Stocks
- They offer greater diversification that generally does not corelate to any other classes of assets.
- They offer income alongside their inflation hedge, as rent rise when inflation also rises. Hence, any investments are protected from inflation as well.
What to Look for in a REIT
It is common to see REITs that offer a very large dividend yield within the first two years. This is an interesting way to attract others. For instance, it could be over 100% of the norm income stream, which would need to be financed through a loan. This is a great opportunity for you to start your investment. Do make sure, however, that you read the small print and that all information is disclosed to you so you can make an informed decision.