Personal Finance - Pros And Cons Of Investing In REITs

Personal finance: Should you be investing in REITs?

Real Estate Investment Trusts or REITs are one of the increasingly emerging investment vehicles worldwide. Understanding REITs is no rocket science. It’s like going to a fancy restaurant, ordering a flamboyant meal, and splitting the cheque with your friends. You get the portion for what you paid and enjoy the scrumptious delicacy. What’s better, REITs give you regular and stable returns over a period of time!

Real estate properties that produce income by investment are exactly what REITs are. Investing in REITs is essentially investments in real estate by buying or financing properties. These facilitate investment transactions mostly on the stock market, thereby providing flexibility and mobility. There is a wide range of real estate investments in which you might want to channelize your funds, for instance, in shopping malls, apartment buildings, healthcare centers, or industrial sites.

In fact, there are various types of REITs that are available in the market, the most common being publicly traded Equity REITs. These are listed on a major stock exchange, where transactions are carried out and yield rent in return. 

On the other hand, mortgage REITs are popular investment vehicles too, which provide returns in the form of interest instead of rent. Now, if you want the best of both worlds, then there is an option to invest in hybrid REITs too, which offer you a combination of equity and mortgage investments. 

Additionally, there are public and private investments in REITs, some of which are listed on the stock exchange, while some are unlisted. Now, the fundamental question that arises is, why should you be investing in REITs? Will it prove to be a good investment instrument for you?

Well, in order to proceed with any investment, for that matter, proper market research coupled with weighing the pros and cons of that particular investment is called for. Here are a few things you may keep in mind while evaluating the advantages and drawbacks of REITs:

Liquidity

• Given that REITs are real investment properties that are actually traded in the stock market, they are a one-of-a-kind investment that offers good liquidity. Usually, buying and selling real estate properties is no cakewalk, it gets time-consuming. However, REITs transactions can be executed in seconds through an appropriate company. 

Stability and consistency

• REITs investment allows you to get consistent income that accumulates regularly over a period of time. You don’t have to invest a great deal of money, likewise, you don’t immediately receive a lump sum. It takes patience, perseverance, and some professional help too to get good returns. And once your money gets fixed in a good avenue, it can fructify into a good amount. 

Diversification

• A diversified investment portfolio is recommended by most professionals as it reduces the risk by evenly distributing it in different instruments. REITs can contribute productively to this diversity, and due to its liquid nature, it provides flexibility to manage the level of diversity too.

Professional management

• REITs companies keep an eye out in the market and are always on their feet to provide you the best opportunities to best channelize your funds. The skills and expertise of these firms can provide a better investing experience for you. However, conduct prior research while zeroing in on a company and choose one which is comparatively more experienced and would work transparently with you.

Management fees

• The benefits of professional management come with a cost. Hence, although the returns would be gradual, the costs associated have to be borne by you at the time of investing in REITs. It also depends upon the company assisting you, but professional help would cost you some money. 

Time period

• You cannot expect quick returns from REITs as they take time to get accumulated into larger amounts. You have to buy or finance investments and hold on to them for a long-time. REITs are more suited to achieve your long-term financial objectives and, therefore, they require patience. 

Conclusion

REITs can give you good dividends, if you plan your journey considering all the factors and, very importantly, take into account your personal finance goals. 

Frequently asked questions

1. Are REITs a good investment?

• REITs are considered to be a fruitful addition to an investor’s portfolio. They help in the diversification of the portfolio while providing returns in the form of dividends and also provide more transparency. 

2. Are REITs a good investment in 2021?

• REITs have performed greatly in recent years and are considered to be good investments in 2021. They also act as hedge investments and, therefore, many investors are getting drawn to them during the inflationary period.

3. What are the drawbacks of investing in REITs?

• The primary drawback of REITs is considered to be the huge amount of dividend that is supposed to be paid back to the REIT holders. It acts as an obstacle for growth as plowing back money into the business is not easy. 

4. Do REITs pay monthly dividends?

• Mostly, REITs pay quarterly dividends; however, some REITs also pay monthly dividends. This is considered to be beneficial for many investors as frequent payments compound quicker. 

5. How do REITs make money?

• The dividends earned by way of REITs are earned similarly to the ones earned by stock trading in the market. The investor receives dividends and is free to sell their share when the value increases.