Other Financial Instruments
Real Estate Investment Trusts or REITS are companies that own finances tied to income-generating real estate. Similar to mutual funds, they pool the capital of multiple investors and enable them to gain dividends without having to own property themselves. They are traded on security exchanges like stocks, making them very liquid instruments, unlike owning physical real estate. They span a variety of property types, from apartments to retail centers.
There are several types of REITs. Equity REITs are the most common and generate income through collecting income from rent. Meanwhile, mortgage REITs generate earnings through lending money to real estate operators in loans or mortgages. Their earnings lie in the spread between the interest from mortgage loans and the cost of funding these loans. Hybrid REITs combine the two strategies.
Pros and Cons of REITS
The upside of investing in REITs is that it provides a stable, annual dividend with the potential of capital to appreciate long-term. With a stable cash flow and risk-adjusted returns, it is a unique addition to a portfolio with its diversification and dividend-based income. However, REITs often are subject to hefty management and transaction fees and only a slim percentage of taxable income can be used to reinvest into new holdings. Most are paid back to investors.