Amongst many in the country, investments are the new order of the day. Many have gone beyond just hiding money away to understanding that the time the money spends in hiding only keeps the value at the same level. The value can be more and this is what various investment schemes of which Real Estate Investment Trusts (REITs) are included aim to do.
Real estate investment trusts are not well known by Nigerians, but they offer maximal returns with minimal risk for investors. In this article we examine all the basic information you need to know about real estate investments.
What Are Real Estate Investment Trusts?
Think of the common thrift arrangement where savings are accumulated collectively, the investment structure is what REITs are. REITs are a collective investment scheme; they work essentially by pooling capital from numerous investors. These funds are secured by the Securities and Exchange Commission (SEC) while they are being pooled and they are eventually used to purchase income generating properties, lands or even used to finance interest generating mortgage loans.
What this means is a securing of your funds while they are not yet invested into property and an application of your funds to real estate that yields you an interest every month. The properties or lands purchased are kept under the supervision of professional management, who manages the property in a manner that ensures that every investor gets paid a certain interest at by a flow-through basis.
Best part is how the REITs, just like stock, are bought and sold on the exchanges. This makes it clear to everyone every process around the properties invested in. REITs offer investors a stable and consistent means to get income from real estate properties without having to purchase or manage the property directly. It is safe to say that with REITs you actually get to experience being a landowner without actually directly relating with any tenants.
Types of REITs
In Nigeria, as classified by the Nigerian Stock Exchange, there are three types of REITs in Nigeria. They are:
Equity REITs – purchase, hold and manage commercial and rental properties. Though they will finance these properties in many cases, their primary focus is on profits through acquisition and management.
Mortgage REITs – do not purchase, own or manage properties. They invest in mortgages on real estate properties. Though these properties serve as collateral for the loans the mortgage REIT invests in, the REIT has no ownership position in the property itself.
Hybrid REITs – combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
Are REITs Similar to Stocks?
REITs definitely are similar to stocks. Asides from the properties of REITs being bought and sold on the exchanges just like stock, here are some other similarities
· They are both bought purchased on a stock exchange platform
· They are both made publicly available and can be bought and sold when you want.
· They both offer a steady source of income
· They are both long term investments with high prospects for growth.
· They are both subject to SEC regulations
They however differ in that the ranges of stocks are on companies both small and large; on the other hand, REITs have a range on various kinds of properties.
Benefits of REITs
· Liquidity
Liquidity refers to how easily you can get your hands on your money. REITs are publicly traded and as a result can be bought and sold quickly. This means that in the case of a financial urgency you can get your money and it is not tied down without an end in view.
· Diversification
REITs are the better paying and equally secure option to other investment options. Secured by the SEC, they keep your money protected whilst still ensuring that you get your income without delay. This diversification helps lower your risk of loss and increases the stability and earning potential of an investment portfolio.
· Dividend based income
REITs offer a stable form of dividend. For example, in publicly traded REITs, dividends are earned from the profits of the company the way you receive dividends from stocks. They are paid either monthly or quarterly as a percentage of the current stock price.
Generally, REITs yield high dividends especially because REITs are required by law to distribute by law to distribute 90% of net earnings to shareholders
· Protects your money
Managed by the SEC, REITs are required to invest at least 75% of their total assets in real estate? REITs are also required by law to distribute at least 90% of income earned from their real estate investments directly to investors. In Nigeria where the real estate industry is largely unregulated and chaotic, investing in REITs remains the safest route to profitable real estate investments.
Beyond stocks, regular real estate investments and mutual funds, REITs offer the best of both worlds – having a part in a property that keeps you earning and protects your invested amount invested. REITs are secure and are a solid investment if you’re looking to earn regularly. They pay yields in the form of dividends no matter how the shares perform.
