Investing in cryptocurrency still throws up uncertainty and risk. But is real estate still the real deal?
If you want to invest in the real estate market but aren’t ready to purchase a full property, real estate investment trusts could be the answer
Investing in real estate can seem daunting, and the high upfront costs often keep would-be investors at bay. What cautious investors may not realise, however, is that one need not purchase an entire property to invest in the real estate market. REITs, or real estate investment trusts, have been one of the best-performing assets globally since the 1960s, and the trend is gaining popularity in the Middle East. In the US, REITs have become the real estate investment method of choice for a majority of investors.
A REIT is an investment option that is made up of both a regular stock and a real estate investment. With a REIT, money is collected from a number of investors and a trust pool is created. The pool is then used to make long-term investment in real estate. Most commonly, REITs are equity-based, with shares invested in a basket of income-generating real estate assets. As with a mutual fund, REIT investors benefit from the professional management of fund managers.
Investing in REITs is a bit like purchasing shares in a business — its health is very much dependent on its management. Publicly traded REITs are top tier, with the portfolio built on quality commercial real estate. These REITs hold their value incredibly well if cared for by experienced professionals.
In short, REITs allows investors to earn returns from the real estate market with minimal commitment. For first-time investors, REITs have three main benefits:
Real estate liquidity
Publicly listed REITs allow investors to sell and buy shares instantaneously, just like any other investment. With traditional real estate investment, the process of buying and selling can be extremely inconvenient. REITs provide a way for investments to remain liquid, giving the investor more flexibility.
Diversification is key for a healthy investment portfolio. Publicly listed REITs lower risk for investors by allowing for a more diverse portfolio through sector, geography, strategy, property and tenant. While wealthy investors can achieve diversification by multiple properties, REITs allow investors to enjoy the security of a diversified portfolio without a huge upfront investment. REIT investors can choose between broad exposure to the REIT market, or a regional or even single-country exposure.
The real estate market can be a roller coaster. It moves in cycles, which requires that investors keep a steady eye on their portfolio performance to achieve long-term, sustainable returns. REIT funds are managed professionally, and a seasoned fund manager will be proactive about adjusting your exposure to maximise shareholder value. REITs also employ reliable professionals to manage real estate property, taking on the time and skill requirements involved in managing a physical property.
REITs can be an excellent, low-risk way to be involved in the real estate market. REITs are paid in dividends to investors, providing safer returns even during market volatility. Because REITs have to distribute the majority of the income to investors, it is a great option to benefit from property ownership without putting up huge capital or risking it all during market slumps.
The writer is CEO of Kaizen Asset Management Services
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