7 Types of REITs You Want to Invest In Now! (Beginner’s Guide)
KEY TAKEAWAYS
- There are seven common types of REITs; commercial REITs, Healthcare REITs, Hospitality REITs, Industrial REITs, Retail REITs, Residential REITs and REITs ETFs.
- REITs can be separated into 2 sub-type; private REITs and Public traded REITs.
- REITs is a great way to invest in real estate even if you do not have much money to invest.
- REITs can be a good way to generate passive income.
Investing in physical real estate is one of the best ways to invest for building passive income through investing and long term wealth, however not everyone have the money required to start real estate investing. Real Estate Investment Trust (REITs) offers you the opportunity to invest in the real estate sector with little money.
Here we will explore the different types of publicly traded REITs investors can buy to build passive income and generational wealth for your financial future.
How To Invest In Real Estate?
In order to purchase a big ticket item such as a real estate, there are 2 main ways an investor can invest in the real estate market:
- Buy property Individually. You take up a loan and buy the property as an individual investor. You are the sole owner of the property, but you will bear all the risk associated with the property.
- Buy property by crowd-sourcing. You and many other like-minded individuals pool your cash together. Using the power of the masses, you will buy the property as a partial owner of the property through an investment trust or REIT.
In this article, we are going to talk about buying a property with the power of the masses through REITs.
What Are REITs And How Do They Work
REITs stand for “Real Estate Investment Trusts” a company that invests in income-producing real estate. These companies tentatively own and manage a diversify portfolio of properties. Unlike stocks, REITs typically provide high dividends in addition to the potential of the capital appreciation of the underlying price of the REITs.
REITs act like a hybrid between stocks and bonds, where the price of the REITs can rise or fall like a stock, and it pays out dividend like bonds. With REITs, it is usually invest for the long-term as a form of passive income investing.
REITs is an investment tool that allow small individual investors to invest in a portfolio of income-producing real estate through share ownership with other investors of the REIT.
Buying REITs is the quickest and easiest way of becoming a landlord without the hassle of attending to your tenants.
Different Types of Equity REITs
Generally, when we mention REITs, we mean equity REITs, thus in the list of REITs below we will be focusing on the different types of equity REITs.
1. Commercial REITs
Commercial REITs are also sometimes known as Office REITs. These commercial real estate investment properties primarily rented to business owners as offices. Commercial REIT usually has a number of office buildings under its care.
Many big companies such as FaceBook, Google, and Twitter have their office residing in one of the properties own and managed by these commercial REITs.
If Facebook is the tenant of the commercial REIT you just brought. You my friend the landlord of Facebook.
Some other tenants of office space are people who want a co-working space. Currently, we see an increasing trend in the number of people renting a co-working space.
The offices are usually equipped with many facilities that only big companies with huge budgets can afford. These offices are especially attractive for smaller companies and startups which have a limited budget.
This type of working space has the benefit of maximizing the utility of the office space. In addition, it supports a culture of innovation and encourages communication between tenants to share their ideas.
What to take note of when buying commercial REITs?
As the culture of office space uptake is changing.
Many companies are adapting to increase focus on having employees with a balanced lifestyle and allowing work-from-home.
Hybrid work arrangement have become increasingly popular amount many companies.
Currently, there is an increase in the popularity of offices outside the CBD area.
2. Healthcare REITs
Healthcare REITs own and manage healthcare-related real estate and generate their income from tenants. Properties owned by a Healthcare REIT are; hospitals, clinics, nursing homes, and assisted living properties.
The clinics you found in the streets near your home might just be an example of the Healthcare REITs.
What do you, do when you get sick?
You see a doctor!
Healthcare is a basic necessity for every individual!
You can be old in your 80s, healthy age of ’20s, or just an infant, you will need healthcare at some point of your life.
This makes healthcare REITs one of the best defensive REITs, resilient to market conditions.
With an aging population where people live longer and are better access to medical treatment. The healthcare sector will probably see a rise in demand and proper infrastructure will have to be built to support the medical facilities.
What to take note of when buying Healthcare REITs?
Healthcare REITs might not be exciting, but they might be a gold mine for the years to come!
As the average life expectancy of the world increases, more people will need good healthcare.
Healthcare REITs are generally stable defensive investment with minimal fluctuation in price.
If you are an investor with lower risk tolerance, this might just be what you are looking for.
3. Hospitality REITs
Hospitality REITs own, acquire, and manages real estate properties that provide short to long-term stay for individuals. Hospitality REITs own properties such as hotels, motels, resorts, and serviced apartments.
Remember that 5-Star hotel you stayed in last summer for over $500 per night?
How about that majestic hotel you drive past every day on your way to work?
Do you want to be the owner of that amazing hotel, with a personalized Jacuzzi in each room, facing the white sandy beach where crystal clear waves from the ocean orchestrate the beautiful melody of the sea?
Hospitality REITs make your dream possible.
With the constant stream of tourists coming into the country, the hospitality industry looks to be very attractive. And as an investor, you may want to pop a champagne or two to celebrate.
However, some REITs diversify their portfolio by having properties all over the world. Hotels owned by Hospitality REITs are almost completely dependent on tourist arrivals. This led to high volatility in the Hotel Business.
At the peak season of the holiday, even that hotel that you never knew existed may have a full booking. For the rest of the year, hotels might have to give promotion after promotion just to fill half their rooms with tenants.
What to take note of when buying Hospitality REITs?
Hospitality REITs are one of those REITs which is most affected by the law of supply and demand.
When there is a pandemic or events that affect tourism, hospitality REITs will be the first to get impacted.
As an investor, you will need to do some research on the demand before you buy any of these hospitality REITs.
4. Industrial REITs
Industrial REITs own and manage spaces equip with specialized facilities for industrial use. Industrial REITs rent these spaces to tenants for rental income. Often, industrial REITs own facilities such as warehouses, logistic centers, manufacturing centers, and business parks.
Some examples of industrial REITS are the manufacturing centers and logistic centers located in Tuas or rural parts of the country.
Companies such as Nestle® and Johnson and Johnson® rent these manufacturing centers to manufacture the products we commonly use and consume.
Driven by the manufacturing sector and driving the GDP of the country, these industrial REITs helps to get people employed and goods manufactured.
When assessing industrial REITs, it is important for investors to look at their occupancy rate and their location.
What to take note of when buying Industrial REITs?
With the right law and policies of a country as well as a suitable pool of talent, it can attract big MNCs such as Novartis® and Apple® to set up manufacturing sites in the country.
Country’s laws and policy will help to drive the rise and fall of industrial REITs as it will greatly determine if you will have any tenant.
Nonetheless, industrial REITs can be very attractive to investors.
With a lease of usually 10 to 30 years, these REITs provide a stable income for investors.
5. Retail REITs
Retail REIT owns and manages retail real estate. They rent out retail space to tenants to generate income. Retail REITs owns properties such as; large regional malls, shopping centers, shopping district, and general retail spaces.
Retail REITs is a special type of REIT that most female investors will have an unfair advantage over the boys.
Why?
Because Retail REIT owns the shopping centers. Ladies who love shopping much more than boys know every single inch of the shopping center.
A lady can always tell you, “Which shopping center has the most people, which place sells the best dessert, or which shopping center just opened”. The girls know more about the latest trends and shopping, more than we boys know about football.
Almost all shopping centers that you visited last weekend are most probably owned by Retail REIT.
Retail REITs are one of the most popular forms of REITs. Comparatively, retail REITs are much easier to understand.
- Retail REITs rent out shop space
- Retail REITs collect rent periodically
As an investor, our research is basically doing our site inspection by shopping at our favorite shopping center.
What we want to look for is simply 2 things:
- Observing the operations of the shopping center’s management.
- Observe the foot traffic.
Some other metrics we want to know are the occupancy rate, as well as turnover rates. These are key components to consider when looking at Retail REITs.
What to take note of when buying Retail REITs?
The next 10 to 20 years will be quite challenging for Retail REITs.
Retail REITs might be risky because with the advance in eCommerce and people getting more comfortable in buying items online.
Nonetheless, there are still many people who still prefer to shop at the malls or have a meal in a fancy restaurant.
Retail REITs should still be a good investment for the next few years, but in these changing times, we can never be sure.
6. Residential REITs
Residential REIT owns and manages a portfolio of affordable rental homes, apartments, student housing, or residential buildings. A residential REIT is the most similar to being a conventional landlord, minus the hassle of managing the tenant and the stress of paying the mortgages.
The main factor that affects this REIT is considering how affordable the homes are in the target area.
If homes are very affordable, more people will tend to buy them to rent a place to stay.
When home prices are extremely high, the number of people who are forced to rent is higher. This increase the rental prices. Thus, most major residential REITs focus on the CBD areas where housing prices are high.
What to take note of when buying Residential REITs?
Residential REIT is one of a few which have a higher dependence on the law of demand and supply.
Cities with growing economies will attract more people to find jobs. This will bring higher demand for rental homes, thus your investment return as a Residential REIT Investor.
Knowing the trend on the growth in population in the city is essential, when an investor is considering on investing in residential REITs.
7. REITs ETF
Real Estate Investment Trusts (REITs) Exchange Traded Funds (ETFs) are ETFs that invest their assets in REIT stocks and related derivatives. REITs ETFs have passively managed baskets of REITs, shares of which are sold on an exchange.
REITs ETF is the holy-grail of REITs investing diversification.
Not only each REIT will have a wide portfolio of properties, but the right REITs ETF will also have properties of a wide range of industries.
Each and every property are professionally managed and will bring you a yearly, quarterly, or even monthly dividend income.
Why REITs ETF is probably the best REIT for beginners investors?
REITs ETF makes investing in REITs simpler and easier by saving you the trouble of picking and choosing which REITs to invest in.
Furthermore, you are highly diversified thus you will not be exposed to too much risk in comparison to a single REIT.
As an added bonus, an ETF is also less volatile which does not require you to monitor its performance closely.
REITs ETF is the perfect investment for lazy income investors.
With a current distribution yield of 5.27% and potential growth of the ETF itself. REITs ETF is not too shabby for consideration.
Private REITs And Publicly Traded REITs
REITs can be further separated into 2 main types of REITs:
- Private REITs
- Publicly Traded REITs
Private REITs are non-traded REITs that raise money directly from financial institution, or individuals through financial advisors. These cannot be bought and sold in the exchange but often offer a higher rate of dividend than publicly traded REITs.
Publicly traded REITs are listed on a national security exchange where individual investors can buy and sell their REITs like stocks in the exchange. These are highly liquid as these REITs are traded on stock exchanges. But the downside is that many REITs offer an average rate of dividend for the individual investors.
Two Main Types Of REITs
REIT investing typically falls into one of two main types:
- Equity REIT
- Mortgage REIT (mREITs)
Equity REITs earn their income through dividends generated by long-term ownership of properties in different types of industries such as office building, shopping center, hospitals, hotels and apartments.
Mortgage REITs earn their income through interest income from mortgage and mortgage-backed securities (MBS) essentially providing liquidity to the real estate market. With mortgage REITs, you are basically investing in mortgages instead if the underlying properties.
While these are the two major categories of REITs, you may also find the third not so common REITs called the “hybrid REITs” where it consist of both the equity and mortgage REITs.
Why Should You Consider Buying REIT?
REITs are an income-producing investment that helps to generate cash that put money into your bank.
The income generated is called dividend that is credited to your bank account on a periodic basis. The frequency of the dividend distribution depending on the policy of your REITs
- Monthly dividend distribution.
- Quarterly dividend distribution.
- Bi-yearly dividend distribution.
Moreover, you are able to gain a passive rental income without the stress of paying the mortgage or handling difficult tenants.
Best of all, REIT investing is not just open to the rich and powerful, but to the commoners like us who do not have much money to invest.
If you are interested in learning more about REITs, it si good to understand the pros and cons of investing in REITs in my other article as well.
My Take Away
REITs like all investments, there is a certain level of risk.
Some REITs are more volatile, while others are more defensive. There are different factors that affect how each type of REIT works.
Some REITs are easier for us to do our research, while others may require some digging for information.
Some tenants of REITs are for companies, others are individuals like you and me.
Buy Low, Sell High is the Key to Investing.
But knowing when to buy or sell is the Key to success.
Just knowing the types of REITs does not automatically make you a great investor.
REITs are one of the many investment vehicles that you can take to success. You have to learn constantly and understand the game of investing.
Here are some resources that will help in guiding you to your success.
What guides me in my journey are some of the many books I read over the past years. There are also many words of wisdom said by those who have achieved what we want to achieve and learning from them is the shortcut to our goals.
Taking your First Step is always hardest, But it is the Most Important Step to Greatness
- How to Use Webull Singapore to Trade, Buy and Sell Stocks? (Beginner’s Guide)
- How to Use Moomoo to Trade, Buy and Sell Stocks? (Beginner’s Guide)
- Best Trading Platform For Beginners in Singapore (Students, NSF, Fresh Graduates)
- Day Trading For Beginners: Guide On How To Become a Day Trader
- Average Brokerage Fee in Singapore: 20+ Broker Fees Compared
Join 900+ BUDDIES who are growing their wealth with our weekly Income Newsletter
Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).
