If you are looking for a way to invest in commercial real estate property without the hassle of buying and managing those properties, then REIT might be the right choice.
A REIT, or Real Estate Investment Trust, is a company that operates income-producing real estate properties. REITs are designed to provide a way for individuals to invest in large-scale, income-producing real estate without having to buy it.
There are two primary types of REITs:
- Equity REITs. Equity REITs own and operate real estate. They typically invest in income-producing properties, such as shopping malls. Equity REITs generate income from rent payments and other sources, such as parking fees and leasing commissions.
- Mortgage REITs. Mortgage REITs invest in mortgages, such as mortgages on commercial real estate. They invest in mortgage-backed securities, which are bonds that are backed by pools of mortgages. Mortgage REITs generate income from interest payments on the mortgages they hold.
Real estate investment trust: worth diving into or not
Whether having a REIT portfolio is worthwhile depends on your individual circumstances. However, there are some general pros and cons to consider.
Pros of investing in REITs
- Income: REITs generate income from rent payments, which is a source of passive income.
- Tax benefits: REITs are pass-through entities, which means that their income is taxed at the individual level.
- Portfolio diversification: REITs provide diversification to a portfolio as they invest in different types of real estate.
- Growth potential: REITs can appreciate in value over time, which leads to capital gains.
Cons of investing in REITs
- Real estate prices can fluctuate: REITs value goes up and down depending on the value of the underlying real estate.
- Leverage: REITs often use leverage, which means that they borrow money to buy real estate.
- Management fees: REITs charge management fees, which reduce their dividend payments.
Larger market cap mREITs or smaller: where to invest
Larger market-cap mREITs like Annaly Capital Management Inc. and AGNC Investment Corp. are well-known for their high dividend yields. However, in the past year, they faced challenges in the interest rate environment, leading investors to consider smaller-cap mREITs with positive REIT performance.
One such option is Seven Hills Realty Trust, based in Newton, Massachusetts, which operates as a mortgage REIT. Seven Hills specializes in originating and investing in first mortgages secured by middle-market and transitional commercial real estate. It's important to note that Seven Hills Realty's payout ratio is nearly 100% of its annual earnings per share, indicating the need for sustained EPS growth to enhance dividend coverage and safety.
Another promising choice is Arbor Realty Trust Inc., headquartered in Long Island, New York. Arbor Realty Trust specializes in originating bridge and mezzanine loans for both commercial and residential properties. Despite experiencing minor losses, Arbor Realty Trust stands out as the second-best-performing mREIT over the past year, delivering a total return of 10.96%.
For those seeking impressive returns, Rithm Capital Corp., based in New York and established in 2013, presents an intriguing option. Rithm Capital maintains a diverse portfolio encompassing operating companies, investments, and private capital. Remarkably, Rithm Capital boasts the third-highest one-year total return among all mREITs at 8.38%. Furthermore, it pays a quarterly dividend of $0.25, resulting in an annual dividend yield of 10.42%.
In conclusion, REITs are a good investment for those who are looking for income and diversification. However, it is important to conduct research before investing in any REIT and here YouHold will come in hand.