Nothing Fancy - What are REITs and how do they work?

Nothing Fancy - What are REITs and how do they work?

If you’re new to property investing then you’ve probably heard the term REIT somewhere. If you haven’t heard of it before, well, here you go.

What is a REIT?

A Real Estate Investment Trust (REIT) is a corporation that owns or finances income-producing real estate across a range of property sectors. They operate similarly to a mutual fund, allowing investors to pool their money for the opportunity to benefit from valuable real estate, through dividend-based income and total returns.

Some REITs buy properties and rent them to tenants or develop property from the ground up. Others don’t even own properties at all, only focusing on the mortgage and financial side of real estate.

Private REITs vs Public REITs

Most REITs you may be familiar with are exchange-traded REITs, but there are a lot of private ones that don’t trade on a public market.

Types of REITs

  1. Retail - Approximately 24% of REIT investments are in shopping malls and freestanding retail.
  2. Residential - These REITs typically own and operate rental apartments and manufactured housing.
  3. Healthcare - This can include investing in hospitals, medical centres, nursing facilities and retirement homes.
  4. Office - Receive rental income from tenants who have usually signed long-term leases.
  5. Mortgage - Around 10% of REIT investments are in mortgages.

When were REITs created?

Buckle up time for some history. REITs were established in 1960 by US Congress during the Eisenhower administration. Since then, the US REIT approach has flourished and served as the model for around 40 countries worldwide.

REITs brought benefits of real estate investment to regular Americans for the first time - benefits that were previously only available to large financial corporations and wealthy individuals.

Pros and Cons of REITs

Pros:

  • Diversification - Diversify your portfolio investing real estate instead of only stocks and bonds.
  • Decent income yields - Fundrise (eREIT company in the US) pays around 3% in regular dividends and 5% to 6% average appreciation.
  • High liquidity - Buy and sell shares on public markets.

Cons:

  • Weak growth - REITs must payout at least 90% of their net earnings to shareholders as dividends. This leaves little money for buying more properties.
  • Lack of transparency - Hard to follow what types of assets are held in the REIT and what are the latest developments.
  • No control over performance - Properties are bought and sold for you and investors fully depend on the quality of the management team.

Where does Proptee fit in?

The high liquidity of a REIT is certainly its most attractive feature. Selling shares in minutes compared to 6-12 months makes a huge difference. However, modern investors want transparency & decision-maker power too.

If you’re like me you want to understand exactly what you’re investing in. With Proptee you can diversify your portfolio, make your own decisions and see exactly what you have in your portfolio. In other words, it’s a REIT where you can cherry-pick the properties you invest in. Essentially building your own REIT. How cool is that?

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We wish all of you a Happy New Year and see you in 2022! 🎆

-Saad & the Proptee team ❤️

Now that the year is ending, what was your biggest regret in terms of investing or not investing? Mine was not pouring all my net worth into DOGE! 😂