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Trading financial products on margin carries a high degree of risk and is not suitable for all investors. Please ensure you fully understand the risks and take appropriate care to manage your risk.

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Trading Strategies

REITs: understanding the basics before investing

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Whether you're a seasoned investor or just starting out, understanding REITs (Real Estate Investment Trusts) investing could be an opportunity to diversify your portfolio and possibly maximise your returns. Imagine a world where you can become a real estate tycoon without the hassle of managing properties or dealing with tenants. That's what REIT investing essentially involves. But what is it really and why do so many investors prefer it?

What are REITs and how do they work?

REITs, or Real Estate Investment Trusts, are investment vehicles that allow individuals to invest in real estate properties without directly owning them. They operate similarly to mutual funds, pooling together funds from multiple investors to purchase and manage a portfolio of income-generating properties.

REITs generate income primarily through rental payments from tenants, which is then distributed to shareholders in the form of dividends. They must adhere to specific regulations, including distributing a significant portion of their taxable income to shareholders as dividends.

REITs invest in various areas of real estate, including:

  • Residential: apartments, single-family homes, and other residential properties.
  • Commercial: office buildings, retail spaces, industrial warehouses, and other commercial properties.
  • Healthcare: medical facilities, including hospitals, clinics, and senior living communities.
  • Industrial: distribution centres, logistics facilities, and manufacturing plants.
  • Hospitality: hotels, resorts, and other lodging properties.

By diversifying across different segments of the real estate market, REITs provide opportunities for investors to gain exposure and potentially earn returns from a range of property types.

To qualify as a REIT, companies typically need to fulfil specific requirements. In the United States, for instance, a company must ensure that the majority of its assets and income are linked to real estate investments. Additionally, it must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Similarly, in the UK, a REIT must allocate 90% of the profits generated from its property rental business to its shareholders. These regulations ensure that REITs prioritise investor returns and maintain a focus on real estate ventures.

How to invest in REITs

Investing in REITs offers individuals various avenues to explore. Here are some popular methods:

  1. Purchase publicly traded REIT stocks: You could buy shares of REITs that are traded on stock exchanges or through CFDs platforms such as Skilling, similar to investing in individual company stocks.
  2. REIT mutual funds and ETFs: You may also consider investing in mutual funds or exchange-traded funds (ETFs) that focus on REITs. These funds provide diversification by holding a portfolio of multiple REITs.
  3. Public non-traded offerings: Some brokers, such as online real estate broker Fundrise, offer opportunities to invest in non-traded REITs. These may have different liquidity terms compared to publicly traded REITs.
  4. Financial advisors: Financial advisors could provide insights and guidance on investing in REITs, helping you navigate the market and make informed decisions.
  5. Real estate crowdfunding portals: Some platforms allow you to invest in public non-traded REITs through real estate crowdfunding. This option may however require additional research and due diligence.

Furthermore, it's also crucial to assess the quality of properties, tenants, and the overall performance of the REIT before investing. You may consider consulting relevant financial resources and consider seeking professional advice to make well-informed decisions.

Can REITs be traded?

Yes, they could be traded just like stocks on stock exchanges or through CFDs. Publicly traded REITs are usually listed on major stock exchanges and can be bought and sold throughout the trading day. This provides investors with liquidity and the ability to easily enter or exit their positions.

Trading REITs is similar to trading stocks. Investors can place buy or sell orders through their brokerage accounts, specifying the number of shares they want to trade and the desired price. The market price of a REIT share will fluctuate based on supply and demand dynamics and the overall performance of the trust.

It's however important to note that they can experience price volatility due to factors such as changes in interest rates, real estate market conditions, and investor sentiment towards the sector. Therefore, investors should conduct thorough research and analysis before trading them, just as they would with any other stock investment.

Remember, it's essential to consider the specific characteristics of the trust, such as its property portfolio, management team, dividend history, and financial performance. These factors could impact the attractiveness and potential returns of the investment.

How to get into REIT investment with CFDs

Whether opting for direct share purchase or exploring the convenience of CFD (Contracts for Difference) trading, investing in REITs could open doors to a world of diversified real estate opportunities. Thanks to platforms like Skilling who offer CFDs, navigating the REIT market becomes more accessible. CFDs allow traders to speculate on the price movements of various underlying assets, such as stocks, ETFs, commodities etc. without actually owning the underlying asset. Using CFDs to trade REITs could provide certain advantages such as leverage, short selling, and liquidity. However, it also carries significant risks. It's essential to have a solid understanding of CFD trading and risk management strategies before considering this approach. Check out Skilling to get started with CFDs today.

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Not investment advice. Past performance does not guarantee or predict future performance.