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Investing in real estate has become a popular choice for many young adults who are looking to make a name for themselves in the business world. Real estate investing is very lucrative as long as you can stay invested and sell your investment once it has become profitable.
A real estate investment trust is one of the easiest and most popular ways to invest in real estate. In this article, we'll cover the advantages of REITs and explain how to get started investing in real estate.
What is a Real Estate Investment Trust?
A real estate investment trust (REIT) is when a company invests in a building together with multiple people. The building is then rented out or leased to gain earnings. The result will be divided into two parts: to the shareholder's pockets and to invest in another building of the company's choice.
REITs are similar to mutual funds but are more specific to real estate. They allow people to own a piece of real estate and make money by investing in properties that have already been built.
They provide investors with the opportunity to take part in building new properties and also manage properties that are already being used.
Why Do Investors Choose Real Estate Investment Trusts?
Most people invest in REITs because they believe in their potential as an investment asset class. Many people believe that real estate has been grossly undervalued over the past several years and is an attractive investment opportunity in its current state of distress.
Because these investments trade over the counter, they are extremely difficult to access and research on your own, which makes them a favorite among hedge funds and professional investors who work with a team of specialists.
Real estate investment trusts are also popular among real estate investors because they are easy to understand. They can be purchased with as little as $1,000 and are traded over-the-counter like stocks, which makes them accessible to anyone with the right fund.
What Are The Pros and Cons of Investing in Real Estate Investment Trusts?
In the following sections, we will take a look at some of the pros of investing in real estate investment trusts. We will also explain what some of the cons might be for you if you decide to pursue this option for your retirement savings.
Pros Of Investing in Real Estate Investment Trusts
They Are Low-Cost
Real estate investment trusts are very inexpensive. They are similar to stocks in that you can purchase them for as little as $1,000.
Because of this, you do not have to invest a large amount of money and can start small.
There are over 3,000 real estate investment trusts (REITs) in the U.S. that offer you the opportunity to invest in different types of real estate, including commercial and residential properties.
Because there are so many different options to choose from, you are likely to find one that fits your investing style and needs.
Low Risk of Liability
REITs are often referred to as “passive” investments. This means that you will not have to worry about any kind of investment risk.
Unlike stocks and bonds, REITs do not fluctuate in value. You will receive your money back when you sell the property and pay a low fee for the management of the real estate investment trust.
Easy to Manage
REITs are often managed by a third-party company that takes care of the day-to-day activities of the investment. This means that you do not have to be concerned with the business aspects of your investment.
You simply receive a check from the REIT each month and can invest as much or as little money as you want.
Better Long-Term Return
There are many benefits to investing in real estate investment trusts. The first is that you will receive a better return than other types of investments.
For example, the average annual return for stocks is about 10%, while the average annual return for REITs is more than 30%.
This makes them a good investment option for long-term investors.
Cons Of Investing in Real Estate Investment Trusts
Easily Affected by External Factors
Real estate is the one sector that is highly sensitive to external factors. That is, it can easily be affected by changes in interest rates, property values, government regulations, and more.
In addition to that, the real estate industry also tends to be highly unstable and not very lucrative as well.
This means that it’s important to diversify your portfolio and make sure that you don’t have too much money tied up in one type of investment.
Strictly Long-Term Investment
In most cases, real estate investment trusts are not suitable for short-term investments. It is recommended to invest in these funds for at least 5 years.
At the beginning of your investment, you can choose a mix of real estate stocks and bonds that will help you reach your desired amount in time.
Increasing Interest Rate
There is no doubt that there have been some very bad real estate investments over the past few years.
This means that there are some very high-risk and high-loss investments that you could end up making if you invest in them without understanding them thoroughly first.
The increasing interest rate is one of the worst reasons why real estate investments can go bad. As these funds are long-term investments, you will have to keep your investments in the fund for a long period.
Therefore, your investment will be exposed to increasing interest rates.
There Is an Account Service Fee
If you want to sell shares of a REIT, then you will have to sell them through a third-party dealer like a broker.
Because they are not traded on an exchange like stocks are, they are not easy to sell in the open market as regular stocks can be. Instead, they must be sold through a broker that has the power and ability to buy and sell them at any time.
Since these funds are usually managed by professionals, they usually have an account service fee. It is recommended to compare the fees of various funds before you choose the best investment option.
The Right Investment for You
We have looked at some of the pros and cons of investing in REITs and determined whether they are right for you.
There are many different types of investments that you can make, so it is important to do your research and make sure that you invest in the type of investment that will be best for you.