Key Takeaways
● A REIT(Real Estate Investment Trust) is like a mutual fund that invests in real estate assets.
● REITs have some features:1.Liquidity2.Required distribution 3.Low correlation with other financial assets
● Their prices can still suffer and cause their investors to lose money if the real estate market is on the decline or the portfolio companies are faced with difficulties.
What Is a REIT?
To Put it simply, REITs is a product that securitizes real estate properties, including brick-and-mortars, commercial and residential properties, facilities, etc., allowing investors to invest in real estate with a small amount of money.
Pros of Investing in REITs
As with all investments, REITs have their advantages:
1. Smaller investment & higher liquidity: REITs feature higher liquidity and lower investment amount compared to investing in real estate directly.
2. Potential cash flow: As properties can be let out for rent, REITs may bring passive income. The U.S. and Singapore laws require trust companies to distribute at least 90 percent of their rental income to shareholders, which may provide greater chances of earning consistent dividends.
3. Inflation-fighting property: Rents are the major source of income for REITs. As inflation goes up, rents also have a chance to become higher. REITs may also provide competitive dividends.
Cons of Investing in REITs
Here are some notable disadvantages of REITs. This list is not all-inclusive as there are other risks not covered below.
1. Potential volatility risk: REITs prices may fluctuate due to market conditions, real estate policies, and economic cycles, etc
2. Concentration risk: If most of the returns on REITs come from a limited number of assets and properties, the price will fluctuate due to rent changes.
3. Interest rate risk: Real estate is typically very sensitive to changes in interest rates, which can affect property values and occupancy demand.
4. Taxes on dividends: Dividends paid by REITs are generally treated as ordinary income and are not entitled to the reduced capital gain tax rates on other types of corporate dividends.
