What Are REITs

• Invest at least 75% of its assets in real estate.
• Derive at least 75% of its gross income from real estate-related sources (e.g., rents, interest on mortgages).
• Distribute at least 90% of its taxable income to shareholders as dividends annually.
• Be owned by 100 or more shareholders, with no five individuals owning more than 50% of shares.

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1. Capital Raising: REITs raise money by selling shares to investors, either through an initial public offering (IPO) or subsequent offerings.
2. Real Estate Investment: The funds are used to acquire, manage, or finance a portfolio of income-generating properties or mortgage loans.
3. Income Generation: Revenue comes from rents (for property-owning REITs) or interest payments (for mortgage REITs).
4. Dividend Distribution: At least 90% of taxable income is paid out as dividends, providing investors with regular income.
5. Trading: Shares trade on exchanges, offering liquidity and price transparency, unlike physical real estate.

• Dividends: The primary income source, reflecting the REIT’s cash flow.
• Capital Appreciation: Potential increases in share price as the underlying properties or assets grow in value.

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1. Equity REITs
   • Own and operate income-producing properties.
   • Examples: Retail REITs (malls), Residential REITs (apartments), Office REITs, Industrial REITs (warehouses).
   • Income Source: Rents and property sales.
   • Most common type, offering a balance of income and growth.
2. Mortgage REITs (mREITs)
   • Invest in mortgages or mortgage-backed securities rather than physical properties.
   • Income Source: Interest from loans or securities.
   • More sensitive to interest rate changes but can offer higher yields.
3. Hybrid REITs
   • Combine elements of equity and mortgage REITs, investing in both properties and loans.
   • Provide diversification within the real estate sector.
4. Public Non-Listed REITs (PNLRs)
   • Registered with the SEC but not traded on exchanges.
   • Less liquid, often with higher fees, but may offer stable dividends.
5. Private REITs
   • Not publicly traded or registered with the SEC.
   • Available only to accredited investors, with limited transparency and liquidity.
6. Specialty REITs
   • Focus on niche sectors like data centers, healthcare facilities (hospitals, nursing homes), or self-storage units.
   • Tailored to specific market trends or demographics.

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1. Accessibility: Investors can own real estate without the hassle of property management or large capital outlays.
2. High Dividend Yields: The 90% payout requirement often results in yields of 3%-8% or higher, far exceeding many stocks or bonds.
3. Diversification: REITs provide exposure to real estate, which often moves independently of stocks and bonds, reducing portfolio risk.
4. Liquidity: Unlike physical property, REIT shares can be bought or sold quickly on exchanges.
5. Professional Management: REITs are run by experienced real estate professionals, sparing investors the operational burden.
6. Inflation Hedge: Real estate values and rents tend to rise with inflation, preserving purchasing power.

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1. Interest Rate Sensitivity: Rising rates can increase borrowing costs for REITs and make their yields less competitive compared to bonds, pressuring share prices.
2. Market Volatility: As publicly traded securities, REITs are subject to stock market fluctuations, even if underlying properties perform well.
3. Economic Downturns: Recessions can reduce occupancy rates, rents, or property values, impacting income and dividends.
4. Sector-Specific Risks: A retail REIT, for instance, might suffer from e-commerce growth, while office REITs could face challenges from remote work trends.
5. Tax Considerations: Dividends are taxed as ordinary income (not qualified dividends), potentially at higher rates than capital gains.
6. Limited Growth: High dividend payouts leave less cash for reinvestment, capping potential capital appreciation compared to growth stocks.

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• Equity REIT: Prologis (PLD)
  • Focus: Industrial properties (warehouses, logistics centers).
  • Appeal: Benefits from e-commerce and supply chain growth.
• Mortgage REIT: Annaly Capital Management (NLY)
  • Focus: Mortgage-backed securities.
  • Appeal: High yields but volatile in rate shifts.
• REIT ETF: Vanguard Real Estate ETF (VNQ)
  • Tracks: MSCI US Investable Market Real Estate 25/50 Index.
  • Holdings: Diverse mix of equity REITs across sectors.

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• Income Seekers: Retirees or those needing regular cash flow benefit from high dividends.
• Diversifiers: Investors looking to balance stocks and bonds with real estate exposure.
• Long-Term Growth Seekers: Those betting on real estate appreciation over decades.
• Beginners: Individuals wanting real estate exposure without direct ownership.

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• Income Component: Allocate 10%-20% of a portfolio to REITs for steady dividends.
• Diversification: Pair with stocks and bonds to reduce correlation risk.
• Growth and Income Mix: Combine equity REITs (growth potential) with mortgage REITs (higher income).

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• Pros: Liquidity, lower entry cost, no management hassle.
• Cons: Less control, exposure to market volatility, no leverage benefits like a mortgage.

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