What is a Low Income REIT and Should You Invest in One?
Based on the name, it should come as no surprise to learn that a REIT is a company that either owns, operates, or finances revenue-earning real estate properties. As a result, one could say that these are very similar to mutual funds in the sense that they let interested individuals pool their resources for investment purposes, thus enabling them to gain access to investment opportunities that wouldn’t be available to them on their own.
Of course, there isn’t a single kind of REIT that can be found out there. Instead, there is a wide range of REITs that focus on a wide range of revenue-earning real estate properties, thus making them suitable for a wide range of investors. One excellent example would be residential REITs, which specialize in rental properties meant for residential purposes. These can be further divided into sub-categories based on various factors such as the kind of rental property as well as the kind of people who make use of their kind of rental property. In the case of low-income REITs, that means a specialization in low-income rental properties.
What Are the Pros of Investing in a Low Income REIT?
Here are some of the pros of investing in a low-income REIT:
One of the biggest upsides to REITs is their high returns. For those who are unfamiliar, there are special regulations for how such companies are supposed to be run. In particular, it is worth mentioning that REITs are supposed to pay at least 90 percent of their taxable income to their shareholders, which is why their dividends tend to be higher than that of most other companies.
Besides this, it is worth mentioning the nature of a REIT’s possessions. Simply put, they own real estate properties, which are very tangible assets with very long expected lifespans. Thanks to this, while the value of real estate properties can still see a fair amount of fluctuation based on a wide range of factors, there is still a limit to how far it can fall because of their tangible nature. Moreover, real estate properties have an interesting characteristic in that their value tends to increase rather than decrease over time, which is not something that can be said for most assets out there. After all, there is a reason that depreciation, amortization, and related concepts make up such a huge portion of corporate accounting. In any case, since REITs are focused on owning, operating, and financing real estate properties, this is very beneficial for their value.
Real estate properties do have some serious weaknesses as investments. One excellent example would be their high cost, which makes them unavailable to most investors on their own. Another excellent example would be the time needed to buy and sell real estate properties, meaning that they aren’t exactly the most liquid of assets even by the standards of long-term assets. REITs are interesting in that they can solve both of these problems. In the first case, it is as mentioned earlier. They enable interested individuals to pool their resources for investing purposes, thus enabling them to gain access to investing opportunities that are otherwise unavailable to them. As for the second, well, suffice to say that buying and selling shares in a REIT tends to be much faster than buying and selling real estate properties, particularly since a lot of REITs are in high-demand.
The rental market is just as susceptible to economic trends as most other goods and services out there. Perhaps unsurprisingly, when a REIT’s clientele isn’t doing so well, they tend to be less interested in that REIT’s rental opportunities, which can have a very negative effect on their numbers. Having said that, there are some kinds of REITs that have built-in resistance to this kind of thing, with low-income REITs being one of them. Basically, there is always a market for low-income housing. Moreover, the demand for such rental properties tends to go up in bad economic times because a lot of people get hit hard, meaning that they can be considered counter-cyclical to some extent.
What Are the Cons of Investing in a Low Income REIT?
For comparison, here are some of the cons:
Lack of Diversification
REITs have been praised for their diversified nature. Unfortunately, single REITs are by no means guaranteed to be diversified. In fact, the ones that focus on a particular kind of client can be the exact opposite, which is an issue for people who invest everything in them. This means that their investment is very susceptible to economic trends that hit whatever it is that their REIT specializes in. For example, a REIT that specializes in retail space is going to suffer if the retail sector gets hammered by an economic recession, though depending on their exact clients, this can be quite survivable for some of them. Regardless, the important part is that a lot of REITs aren’t very diversified when it comes to their holdings, which is something that interested individuals need to consider when it comes to their holdings.
Clientele Not As Steady As Some of the Others
Sadly, the people who make use of low-income housing tend to be much more vulnerable than other segments of the population. If they were in a better position, chances are good that they wouldn’t be making use of low-income housing. Due to this, economic shocks can have an absolutely devastating effect on their ability to maintain their residence, which in turn, can be very bad for the companies that own and operate low-income housing.
Should You Invest in a Low Income REIT?
Generally speaking, REITs are solid choices for people who want to get a good return from their investments. However, this is truest when they adopt a long-term perspective because in the short term, there are many factors that can make the share price of REITs fluctuate, thus making matters very complicated for those who like to buy and sell. On top of that, interested individuals might want to put some serious effort into diversifying their investment portfolios if they want to go for low-income REITs. This makes for steadier returns with less volatility, thus making for a more comfortable as well as a more lucrative experience over time.