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If you are interested in or have been following the financial markets, undoubtedly, you have run across the term Real Estate Investment Trust (REIT). But, unfortunately, there needs to be more clarity about what a REIT is and its purpose in a real estate portfolio.
As REITs have risen in popularity in the real estate industry, many people are investing in them and finding employment there.
Whether you are interested in REITs as an investor or wondering if it’s a good career pathway, this article will help educate you on what a REIT is, how they work, who they are for, and what it may be like working in one.
What are REITs?
Simply put, REITs are a way for investors to pool their money in order to make real estate investing more accessible. Similar to how it would be very difficult or impossible for the vast majority of people to manufacture, market, and service a brand-new smartphone, they can still reap the financial rewards of such a business by investing in Apple stock.
The initial cost to begin real estate investing may not be as high as it is to design a smartphone, but it is still high enough to keep many people from ever getting a foot in the door. Even a modest single-family rental home can easily be over $100,000, and with a 20% downpayment on a bank loan, coming up with cash is too high for many people.
This barrier to entry keeps many people away, not to mention the time and expertise it takes to market and manage the property effectively and efficiently. That example is just a simple rental home. The costs quickly reach millions when investors enter commercial real estate properties.
Many REITs offer investors shares, similar to shares of stock. The shares are listed on major stock exchanges on which the stocks in your 401(k) are listed. The REITs invest in real estate projects and then return the profits to the investors via a dividend. As the profits rise and fall, so does the value of one share trading on the exchange.
Difference Between REITs and Syndications
A syndication is a similar type of investment, although there are critical differences between a syndication and a REIT. The most significant difference is the size of the initial investment.
Syndications, like REITs, are when investors pool their money to invest in a collective real estate project. However, a syndication will generally have far fewer investors, a much more significant minimum investment, and the shares are far less liquid.
The minimum investment on a syndication is generally at least $25,000, and the shares, once purchased, cannot be quickly sold if the investor wants to exit.
In addition, syndication investors must also be accredited, which means they must meet specific investment requirements. Usually, the requirement is a net worth of at least one million dollars, not counting the equity in one’s primary residence.
On the other hand, shares of REITs are bought and sold daily on the stock exchange and are open to anyone with a brokerage account. With only a few hundred dollars, or even less, anyone can become a real estate investor thanks to REITs.
Why Do Investors Like REITs?
Not only are REITs great for everyday investors because they make real estate investing is more accessible, but there are some rules and regulations that REITs must follow to return their profits to the investors in the form of a dividend.
By law, REITs must pay out 90% or more of their taxable profits as dividends to their shareholders. As a result, REITs are typically considered some of the most yield-friendly asset classes, especially during a recession or other economic hardship.
When the economy sours, or simply a company’s profits fall for competitive reasons, often they will decide to hoard cash and cut their dividends. Similarly, companies may also choose to cut their dividend in order to have some money available for capital investments needed to grow their business.
These reasons make dividends from stock investments a bit too unreliable for investors who want or need to depend on them. REITs, by law, must pay out their profits in the form of a dividend. This problem is eliminated, making REITs an ideal asset class for investors looking for a reliable dividend.
What Kind of REITs are There?
Like how mutual funds publish a prospectus listing what types of securities they invest in, REITs do the same thing. In the prospectus, the REIT lists what real estate investments they will purchase with the investors’ money.
Investors will be looking for different types of real estate projects to invest in. This is because there are many different properties, such as office spaces, apartments, hospitals, schools, and warehouses.
There are different types of real estate properties, and therefore There are thirteen different kinds of REITs in the real estate market. Although in some instances, there can be some overlap in the properties of each RIET.
Types of REITs are:
Office REITs own and manage properties that house workplace offices. Everything from skyscrapers in Chicago’s Loop to office buildings in these types of REITs’ can hold business parks in small cities
Industrial REITs own and manage properties such as warehouses and distribution centers and even factories where manufacturing is taking place.
Retail REITs own and manage retail properties and rent space in those properties to retail tenants. These can be anything from small strip malls housing independent merchants to massive shopping malls, outlets, and big box stores.
Lodging and Resorts REITs own and manage hotels and resorts that rent space to guests in tourism and travel.
Residential REITs mostly own apartment buildings, but the real estate shakeup of 2020 related to the pandemic attracted some REITs to single family homes at scale for the first time.
Timberland REITs invest in a land where timber is harvested for sale. Healthcare REITs own and manage properties that house facilities such as hospitals, nursing homes, and medical office buildings.
Self-Storage REITs invest in storage facilities that collect rent from both individuals and businesses.
Infrastructure REITs invest in projects such as energy pipelines, fiber optic cables, and wireless telecommunications towers.
Data Center REITs own and manage facilities related to cloud computing and data storage. Managing these properties involves skills like uninterrupted power supply, climate control, and physical security.
Diversified REITs can own a variety of properties, making them perfect for those are seeking diversification.
Specialty REITs, as the name implies, usually own specific types of properties that do not fit into the other categories. For example, they may own movie theaters, billboards, or farms.
Mortgage REITs invest in mortgage-backed securities or similar assets that provide financing for real estate projects.
REITs as a Career
The popularity of REITs as an investment option has also resulted in a boon for employment there. Many great paying jobs are available for those with various skill sets, making a real estate investment trust a good career.
You may find work as a property manager should you decide to work for a REIT. A property manager in a REIT may oversee many properties as a senior manager, or a junior manager may oversee one property where they spend most or all of their time. These jobs usually require excellent people and communications skills and customer service since they often deal directly with the tenants.
Business Development executives are the ones who identify opportunities for new properties or developments would be a great job if you have excellent business acumen and are good at financial analysis and projections.
Asset Managers in a REIT decide how best to pay for or finance new or existing assets and projects. For example, they may analyze whether it is wise to take on new debt, acquire new properties, or use available cash to pay down existing debt.
Acquisitions Analysts research whether a property would be a good asset for the organization to own or whether a new project should be undertaken. These jobs are great for people who know the real estate industry or want to learn and have a knack for negotiating and preparing agreements.
REITs can be a great place to invest and make a career. The jobs can be high paying and grow in abundance as REITs increase in popularity and the size of the assets they manage.
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