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Are REITs a risk-free way to invest in real estate?

On Behalf of | Jan 30, 2021 | investment Partnerships

From bad business deals to partnerships breaking down and the work to get capital investments, you may have faced your fair share of obstacles. Real estate investment is not without its challenges.

During your research, you may have come across REITs. Are they a more risk-free way for you to grow your real estate investment portfolio?

What are REITs?

According to Nerdwallet, in 1960, Congress created real estate investment trusts. These provided an avenue for small real estate investors to purchase stakes in larger businesses. Put simply, REITs are the crossroads between real estate and the financial market. There are three types to keep in mind:

  • Equity REITs
  • Mortgage REITs
  • Hybrid REITs

What are the benefits of choosing REITs?

The biggest draw is that REITs need to return at least 90% of the taxable income to people who hold shares. It also sets rules in terms of how the entity managing the REIT can earn income and invest money. These and other restrictions add some safety features to this security type. Publicly traded REITs and public non-traded REITs register with the SEC and meet the provided guidelines.

Are they risk-free investments?

Non-traded and private REITs present higher levels of risk. Neither belongs to liquid markets where owners can trade them freely and immediately, compared to publicly-traded REITs. Investors also have a difficult time valuing these REITs, which can further complicate the selling process.

Publicly traded REITs might offer a great opportunity to diversify your financial portfolio and your real estate portfolio. However, Congress created REITs for smaller investors with fewer resources and lower disposable incomes. They do not replace managing real property investments. A more profitable angle for you to consider is whether you can create REITs for your investment properties to obtain more capital investments.