INCOME-PRODUCING ASSETS: REITs VERSUS OTHERS
The current reality of our world hinges upon the shoulders of investments. From the decadent nests of world governments to the steely environments of corporate organizations and even to the innocent spheres of little kids, every part of our society operates under the principles of finance and investment.
To invest is to allocate a thing of value with the hopes of gaining some benefits. For instance, you’re investing your time into this article for the sole purpose of obtaining some forms of knowledge that you could use to sharpen your mental acuity. Whether you choose to invest time, money, or your heart, the resultant expectation is one of a return or a dividend.
Unfortunately, this article, although finance-centric, is not crafted to introduce you to the nuances of finance or cover the expanse of investments. To dabble in this realm is to go on a journey that may span a few years.
In this article, I will be delving into one very specific part of financial investments wherein I’ll compare and contrast a few key players in the field.
So without further ado, let’s take a roller-coaster ride through the financial scope of income-producing assets!
INCOME-PRODUCING ASSETS: WHAT ARE THEY AND WHAT’S THE FUSS?
When breaking down the term “Income – Producing – Asset,” we can immediately observe a connection between the isolated words: Income, Production, and Asset.
Intuitively, this term refers to assets (anything of value that possessed the potential to yield more value) that generate (or produce) a consistent revenue stream (income), which can manifest as interest, dividends, or even cash distributions.
Income-producing assets generate income depending on the asset value. Hence, returns could be on a monthly, quarterly, or even annually basis. The important thing to note is that no income-producing asset is established in stone. Diversity and flexibility characterize the bulk of income-producing resources.
Some of the perks of income-producing properties include:
- The leeway to reinvest often
- Relative predictability of the assets
- Diversity of Choice
- They possess utility
- You have the possibility of sheltering them from Taxes
- Loss offset characteristic
- Capital Appreciation.
Some examples of income-producing assets are:
-Real estate crowdfunding,
-Mortgage Investment Corporations,
-Bonds and Debentures,
-Sublease of properties,
-Peer-to-Peer Lending (P2P lending),
-Tax lien certificates,
-Master Limited Partnerships (MLPs),
-Lease option real estate
-Proof of Deposit (CDs)
-Guaranteed Asset Certificates, and a plethora of others.
As we can see, there are a myriad of income producing assets available in the financial investment space. However, the crux of this article isn’t to go into the laborious work of delineating each and every income-producing asset out there. Instead, we’ll be focusing on one specific type of income-producing asset; discussing, comparing, and contrasting its merits with respect to other income-producing assets. Investors and co. I give you, REITs.
MUCH ADO ABOUT REITs.
REITs stand for Real Estate Investment Trust, and REITs are corporations that possess, and in some cases operate an income-producing real estate. As a starter, know that real estate is a word that describes a form of property which is made up of land and an erected structure, along with its natural resources like water, or minerals, or even agriculture; an interest vested in this an item of real property.
Real Estate Investment Trusts are repute for generating steady long-term revenue as the worth of real-estate appreciates over time. REITs focus on assets that produces income because tax laws promote them to allocate most of their net earnings to their shareholders.
ME TYPES OF REITs
REITs are one of the most diverse and flexible income-producing assets out there. Some few examples of REITs include:
Let’s take a quick look at them:
- APARTMENT REITs:
Apartment Real Estate Investment Trusts revolve primarily around the acquisition of apartment structures. These income generating properties are basically leased to residential occupants. Apartment REITs are an expansive source of large revenue streams due to the massive availability of compartmentalized housing spaces and the growing need for affordable housing. People will ALWAYS want a place to reside, so regardless of how the economic situation of a region, there will always be viable demand for leasing housing.
The flip side, nevertheless, to this REIT lies in class migration from either lower to middle or middle to upper. As more people gain more wealth, they will naturally require more space and try to exit the rental housing scheme. At this point in time, apartment REIT viability will wane.
- OFFICE REITs
As the name suggests, Office Real Estate Investment Trusts buy office space. In this type of REIT, there are generally two broad classifications: Grade A and Grade B spaces. The Grade A spaces are basically high-end office spaces whilst the Grade B spaces are economical in nature.
Office REITs generally make for a solid income-producing asset, especially in today’s clime where startups and gusty entrepreneurs are looking for spaces to set up shop. However, no REIT is unassailable and Office REITs follow this. Office REIT performance is usually subject to the economy of a certain environment, as when the economy weakens and businesses go bankrupt, they most often have to close their office spaces or look for alternative options to stay afloat for until the economic conditions improve. This can greatly put a dent in the revenue stream of an Office REIT.
The internet is also another wall standing in the way of the Office REIT and its revenue streams. As more and more people transition from conventional brick-and-mortar stores to online hosting platforms, office spaces may become redundant. Ultimately, Office REITs have to evolve to target more flexible business operations where office space is a criteria for growth.
- Health Care REITs
Health Care REITs possess assets like hospitals, clinics, pharmaceutical stores, nursing environment, retirement home amenities, and medical structures. Health Care REITs are founded upon the principle that health care is an indispensable and universal right that every citizen, regardless of status or dispensation, requires. And with millions of people around the globe needing constant healthcare, investors key into this salient fact to invest in Health care REITs.
- Industrial REITs.
Ever bought something on Amazon or Alibaba? Do you use Googlregularlyis? If you have or if you do, then you’ve mostly felt the indirect presence of industrial REITs. Large companies who are into shipping, manufacturing or production (such as FMCG companies) on a large scale require some sort of space large enough to sustain their operations. This is where Industrial REITs come into play.
Industrial REITs acquire millions of square feet of storage areas on a global scale and invest in them to amass large returns. Not only have the REITs ended for efficient and substantive income-producing assets, but have also been amongst the highest dollar acting REITs in recent years according to financial statistics.
- Data Center REITs
As our reality continues to evolve in terms of Data acquisition and processing, Data Centre REITs have sprung up to cater for deficits in infrastructure.
Companies like IBM, Google, Facebook and Twitter for instance collect huge amounts of information about their users. All of this data has to be stored somewhere and that’s where DATA CENTER REITs come in. They provide the computing infrastructure needed to make this possible.
Investors have begun to pick up the pace in Data Center REITs due to the huge prospects that exist in Data and Data analytics. It goes without saying that the world is constituted by an expanse of Data. Data is an all important asset that possesses the potential to reel in huge amounts of revenues by companies that haven’t even been born yet. Data REITs are thus huge futuristic assets to consider in the long term.
- Hybrid REITs.
Hybrid REITs combine the vibrancy of regular REITs and Mortgage REITs (REITs that lends real estate projects developers’ money, instead of offering equity) by indulging in both the debt and equity sides of real estate. For investors who needs double exposure to property, hybrid REITs can be a great Income-producing asset.
Some other types of REITs include:
Hospitality REITs (principled on comfort as they develop hotels, resorts and motel),
Timberland REITs (which invest in lots of acres of forests that are useful for selling wood or harvest mineral resources,
Senior Living REITs (focused specifically on the care of the elderly)
Publicly traded type of REITS (provides shares of publicly traded REITs that list on a national securities exchange) and so much more.
As can be seen, REITs can cater to virtually any sector of human endeavor. This makes them very unique compared to other income-producing assets. But what else distinguishes REITs from the rest of the income-producing assets? Why exactly should any investor really invest in REITs over other income-producing assets?
COMPARING REITs AND OTHER INCOME-PRODUCING ASSETS.
One distinguishing factor of REITs is that they allow anyone who wishes to invest in portfolios of real-estate assets (through the buying of individual company stock or through a joint fund or exchange trust fund). Thus, the bondholders of a REIT make a portion of the produced income through real-estate investments without actually having to buy or manage finance property. This is so financially viable and convenient that according to statistics, 87 million Americans finance in REIT stocks through their 401(k) and other form of investment funds.
Taking a historic comparison, REITs have been observed to outperform other income-producing assets in the area of risk-adjusted returns and stable cash flow. In REITs that deal in rental housing assets for instance, a steady cash flow can be generated on a consistent basis. This structure applies to most REIT schematics. As a result, portfolio volatility is greatly reduced. This characteristic of REITs is immensely beneficial to investors looking to sustain their revenue streams.
Compared to other equities, REITs are by definition “pass-through entities” and are needed to distribute minimum of 90% of their taxable income annually to stockholders in the form of viable bonuses. On average, this ensures that REIT shareholders are on a roll in terms of dividends most of the time.
REIT investments also offer critical portfolio diversification for its investors. This means that investors have the ability to diversify what kinds of assets they would like to invest in. Ultimately, REITs have grown exponentially in popularity amongst investors.
In addition, REITs are not only viable income-producing assets, they also appreciate over specific period of time.
One of the most important pros of REITs is that they function alongside a straightforward and easily logical business model. Taking a rental housing asset for instance, the general schematic is:
-obtain leasing space and collection of rent
– Disbursement to investors in the form of dividends.
-Report financial results.
REITs provide the means to generate income streams on a level that will not only ensure viability and stability, but also fosters convenience. As with any investment, understanding the pros and cons of every undertaking is key to success.
REITs aren’t all rosy for instance. They may boast limited liability and low liquidity, may be easy to buy and sell and provide a viable means for portfolio diversification, but are prone to control issues. REITs investors can’t control what a REIT does or doesn’t invest in as opposed to those investors who invest directly in real estate (buying their own properties). Also, there are a number of tax implications that may result as REITs are pass-through entities.
The important thing to note, however, is that every investment is a risk, and the greater the risk the greater the reward. REITs are a potentially growth-centric investment that is sure to consistently churn out steady dividends, all things being constant. A great deal of financial research coupled with expertise is the key to making the best possible financial decisions as an investor.