By Paul Maplesden
Real Estate Investment Trusts (REITs) are a way to invest in real estate growth with none of the hassle of actually buying a property. When you invest in a REIT, you’re putting your money into a fund that buys real estate and then returns the profits from that real estate to the fund investors.
Who should use REITs?
The best way to see REITs is as a way to diversify your investments. Although they can still be a relatively volatile investment, over longer periods you can expect to see returns of 8-10% a year. Because they don’t rise and fall completely in sync with the overall stock market, but rather with property values, they help you to spread your risk.
How do REITs help you meet your financial goals?
In addition to REIT funds increasing in value, they also provide very good returns through dividends. A REIT must pay out 90% of its profits as dividends, and this can be extremely beneficial for investors looking for a good income without having to sell their holdings.
Because the value of REITs can increase and decrease relatively quickly, the dividends that they pay can also fluctuate, so bear this in mind when you’re looking at returns.
How long should you keep a REIT fund?
Like most other investments, you’ll see the best returns over the long term; unlike many other investments, you’ll also see good annual rates of return through dividends.
What are your expected returns?
. The main benefit of a REIT is the returns that you will get from dividends. Typically, you will see an annual return of between 6-8% from dividends alone.
. Including capital growth, you can expect returns of 8-10% a year over the long term.
What are the benefits of REITs?
. High dividends – REITs pay out the majority of their profits as dividends.
. Not strongly correlated to the stock market – The price and return of REITs are not as tied to the stock market as other investments and funds.
. Tradable – You can buy and sell REITs on the financial markets.
. Choice – There are lots of REITs to choose from.
What are the drawbacks of REITs?
. REITs are very sensitive to changes in the base interest rate because this affects the purchase and cost of real estate.
. REITs can be volatile in the short to medium term.
How do you invest in REITs?
There are a couple of ways to invest in REITs:
. You can buy directly into a specific REIT through your broker.
. You can invest in an overall REIT fund through your retirement account or via an online investment account.
Use real estate as an investment if:
. You want to invest for the medium to long term.
. You don’t mind an investment with moderate risk.
. You want to see good annual returns via dividend payments that you can reinvest.