A real estate investment trust is a company that owns or finances real estate. A REIT will invest in rental properties (known as equity REITs), or finance the mortgages (known as mREITs), or both.
If you know how a mutual fund works, REITs operate similarly. Investors pool their money to build enough capital to fund a real estate project. It’s the REITs job to buy, manage and finance income-producing real estate investments. Individuals who have invested in the REIT should then begin earning dividends from rents collected or mortgage interest.
Real estate investment trusts can invest in all different types of property. Some REITs invest in commercial buildings like warehouses, retail centers, office buildings, or medical facilities. While others might specialize in buying residential real estate. There are benefits to every sector of real estate, it just depends on what you’re looking for.
How Do REITs Make Money?
Real estate investment trusts essentially make money through buying, owning, and selling property long-term. As real estate values increase, so do shareholders investments. As mentioned above, investors earn money from REITs in a couple different ways: through rents or mortgage interest.
The Difference Between Publicly Traded REITs vs Non-Traded REITs
REITs are classified by how they are bought, held and sold. Publicly Traded REITs are available to buy and sell on a national securities exchange. While public Non-Traded REITs are not traded, making them less liquid. However, they aren’t impacted by changes in the market, which brings additional stability to non-traded REITs. The SEC regulates publicly traded and non-traded REITs, while Private REITs are not.
2 Main Types of REITs
Equity and mortgage are the two main types of REITs. Equity REITs buy and own actual rental property. Mortgage REITs invest in mortgage-backed securities and mortgage-related assets.
Equity REITs are often referred to as just REITs because they’re the most common. This type of REIT owns and manages real estate and earns money primarily through rents. The bulk of equity REITs are publicly traded and vary across real estate sectors, i.e. commercial, residential, health care, etc.
mREITs don’t directly own real estate and make up only about 10% of all REIT investments. Instead, mREITs finance real property and earn interest on the mortgage.
Here’s how it works: mREITs borrow money at lower, short-term interest rates to then buy 15 or 30-year mortgages with higher interest rates. Investors make their money from the interest on the mortgage minus borrowing costs. This type of REIT acts much like a bank or insurance company and are often considered a financial stock, rather than a real estate asset.
How to Invest in a Real Estate Investment Trust?
If you don’t have a self-directed IRA currently set up, our team of professionals can help you get started by directing you on how exactly to begin the process. Accuplan Benefits Services process is simple, it goes like this:
- Open a new account with Accuplan
- Fund the account by transferring funds from another existing retirement account, and/or contribute this year’s election to the new account
- Use the funded account to make an investment into one, or both, of our REITs.
Contact us here to get started on your own REIT.