What Is a REIT?
Another way of investing in real estate is by investing in Real Estate Investment Trusts.
A Real Estate Investment Trust is a company that owns and finances rental properties on behalf of shareholders.
They work in the same way as mutual funds, whereby private investors contribute money that is then pooled into one fund. The company then uses this fund to buy properties, with most of the income going to its investors.
To be eligible for investing in real estate, UK REITs must follow several rules.
They need to give out at least 90% of their property rental business income to their shareholders each year. Also, three-quarters of their profits must come from the property rental business to operate as a REIT.
Why Is This a Good Way to Invest in Real Estate?
There are several advantages to buying stock in a REIT. The main reasons to consider real estate investment trusts are:
- As the company has to pay at least 90% of its income as dividends, management cannot decrease the dividend payment.
- REITs can help diversify a real estate portfolio by buying more property than an individual would be able to buy.
Are There Any Downsides?
There are some downsides to investing in a REIT.
REITs act like any other company listed on the stock market, which means you can buy and sell stocks in the REIT.
This also has the downside of a REIT equity price continually fluctuating, making the investment less secure than traditional real estate methods.
Secondly, profits are split amongst potentially thousands of investors, making it likely you won’t earn as much money as buy to let investment.
Finally, high dividend percentage pay-outs can often force REITs to enter debt to expand real estate holdings, which may not be sustainable for the future.
For investing in real estate, UK landlords would most likely get more income from buy to let investment.