Understanding Investment Trusts: 5 Types of REIT and How They Work

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Real Estate Investment Trusts (REITs) offer investors an opportunity to participate in the real estate market without having to deal with the complexities of direct property ownership. Even if you don’t have a lot of capital to work with, these investment vehicles allow you to draw returns from commercial rental properties and even healthcare facilities. 

In the sections below, we take you on a tour through the world of REITs. We’ll examine five common types, shedding light on how they work and the potential benefits they could offer you as an investor. 

1. Equity REITs

Equity REITs are the most common form of Real Estate Investment Trust. These trusts purchase income-generating properties and allow individual investors to take a cut of the profits. Equity REIT portfolios may include commercial office buildings, residential apartments, shopping malls, and industrial complexes. 

As an investor in an equity REIT, you’ll earn your income via property appreciation and the rental payments made by tenants. These investment vehicles can be a strong choice for people seeking long-term capital appreciation and a steady income stream.

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2. Mortgage REITs

Mortgage REITs are commonly also referred to as mREITs. They focus on mortgage-backed securities and other debt instruments in the real estate industry. Mortgage REITs generate income for investors via the interest earned on loans provided to property owners. Income can also be generated through the purchase of mortgage-backed securities. 

As an investor, mortgage REITs will give you the potential for higher yields. However, it’s crucial to understand that they also carry higher levels of risk compared to equity REITs. This extra risk arises from credit risks and interest rate fluctuations.

3. Hybrid REITs

Hybrid REITs combine elements of the two REITs mentioned above. When combined, equity and mortgage REITs deliver a mix of income-generating properties and mortgage-backed securities, delivering a balanced portfolio to investors. Hybrid Real Estate Investment Trusts are a great way to offset the risks involved in each style of REIT by incorporating the higher income potential of one with the stability of the other.

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4. Healthcare REITs

As the name suggests, healthcare REITs focus on property investments within the healthcare sector. If you buy into a healthcare REIT, your portfolio could include hospitals, medical offices, nursing homes, and assisted living facilities. 

Healthcare REITs generate income from the lease payments made by healthcare providers. This investment vehicle may be an attractive option if you’re looking for a stable income stream that should continue to deliver returns thanks to the growing demand for healthcare services driven by an aging population.

5. Retail REITs

Retail REITs give you a share of retail properties, which may include shopping malls or standalone retail outlets. Income generally arises from rent paid by retailers, and as an investor, you’ll benefit from the ongoing growth of the retail sector. Retail REITs generally deliver stable cash flow and the potential for capital growth. However, this will depend on property performance.

REITs can give you a convenient and diversified way to invest in the real estate market. Best of all, you don’t need to have millions of dollars of capital on hand in order to be able to invest. Nor do you have to accept an inordinate amount of risk. Instead, you can tailor your investment strategy to align with your financial goals and risk tolerance. 

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As with any investment, it’s vital that you conduct thorough research and personally consult with a qualified investment advisor. All information provided in this article is of a general nature only. An advisor will take your personal financial details into account and help you make informed decisions about your investment portfolio.