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Personal Finance for Expats

What Is a Real Estate Investment Trust?

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In a previous article, I discussed five ways that a person and especially an expat can invest their money other than through stocks and bonds. This next article discusses what a real estate investment trust (REIT) is and why someone should take advantage of this kind of investment opportunity. So what is a real estate investment trust or REIT?

A real estate investment trust is when a company owns and typically operates real estate which generates income. Note that this is different from when an individual owns real estate for the purposes of generating income. REITs are part of a fixed-income portfolio or part of the company’s portfolio. There is another major difference in a REIT compared to other real estate companies and that is that a REIT does not engage in the development of real estate properties to resell them. Instead, when there is a REIT that is established, properties are bought and developed so that the company can include them as part of its portfolio. Your next question may be, why should I invest in a REIT? What are the benefits for me to do this? REITs provide a way for you as an investor to earn a share of the income that is produced through commercial real estate without you having to go and buy commercial real estate. REITs generate dividend income.

There are many examples of what is a REIT. This includes property such as an apartment complex, health care center, office buildings, retail centers and warehouses.

The business model of most REITs is straightforward. The company that has established the REIT is able to lease space and collect rent on the property and then the income generated is distributed as dividends to shareholders. But establishing an REIT isn’t as easy as some may think because it doesn’t happen overnight. Companies that decide to establish REITs must meet certain specific requirements outlined in the Internal Revenue Code. These requirements include:

  • Having to invest at least 75% of its total assets in cash, real estate, or U.S. Treasuries.
  • The company must receive at least 75% of its gross income from real property rents, interest on the mortgages financing the real property, or from sales of real estate.
  • The REIT must return a minimum of 90% of its taxable income in the form of shareholder dividends every year.
  • It must have at least 100 shareholders after its first year in operations.
  • The REIT must have no more than 50% of its shares held by five or fewer people during the last half of the tax year.

There are different types of REITs and for the purposes of this article, I will list and describe five of them.

Retail REIT

The first kind is a retail REIT. A retail REIT is found in a shopping mall. If you are an expat or even a U.S. citizen, make sure that you remember that at the most basic level, retail REITs make money from the rent that they charge tenants. A fact of life is that every property and business owner has to have a consistent cash flow in order to survive and prosper. If a retailer is having a cash flow problem due to poor sales, it is likely that they could delay or even default on those monthly payments and when that happens, the REIT will dissolve. Also, finding new tenants is never easy. Once you have assessed your REIT, it is then important to focus on the type of REIT that you will be investing in. Also, in economic downturns, retail REITs with stronger financial positions will have opportunities to purchase real estate at lower prices. However, there is one big long-term concern that those of us that want to invest in retail REITs will face. Shopping is moving online and owners that have space have basically been forced to innovate and change their strategy. They have attempted to fill their space with offices and other non-retail oriented tenants but even so, this sector is facing increasing pressure.

Residential REIT

A residential REIT is when multi-family apartment buildings are owned and operated. Another type of residential REIT that is common is manufactured housing. If you wish to invest in this type of REIT, there are several factors to consider. For instance, the best apartment markets in terms of yield tend to be cities that have lower home prices relative to the rest of the country that you are living in. This applies as a consideration whether you are living in the U.S., Mexico, or China. When you want to invest in a residential REIT, there are two main factors to be aware of and take into consideration. These factors are population and job growth. When there is a net inflow of people to a certain city it is because there are plenty of jobs and the economy is growing. In a growing situation such as this, you as the investor stand to profit enormously. Residential REITs should continue to do well in cities where the apartment supply remains low and demand for them rises.

Healthcare REIT

A healthcare REIT is when the investor invests in the real estate of places such as hospitals, medical centers, nursing facilities, and retirement homes. The success of this type of REIT depends upon how the healthcare system of that country is functioning.

Office REIT

As the name of this type of REIT implies, when you invest in this type of REIT you are investing in office buildings. You will receive rental income from tenants that have signed leases (usually long-term). There are four questions that any investor should consider when they want to invest in this type of real estate:

  1. What is the state of the economy in my chosen city or country and how high is the unemployment rate?
  2. What are the vacancy rates in my city?
  3. How is the area in which I’ve invested doing economically?
  4. How much capital is available for acquisitions?

Mortgage REIT

A mortgage REIT is a REIT that some investors choose to invest in more than the others I mentioned. This type of REIT invests in mortgages as opposed to equity. Mortgage REITs are not risk-free, though. If interest rates go up, there will be a decrease in mortgage REIT book values and stock prices will go down. In addition to this, future financing will be more expensive and this expense will result in the reduction of a portfolio of loans.

5 Ways to Invest Money Other Than Buying Stocks and Bonds

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Whenever you talk to someone about investing, they invariably assume you are referring to equities, such as stocks and bonds. However, when it comes to investing, there are more ways to invest your money other than just buying stocks or bonds, particularly if you are an expat. Before I go any further, let me just say that I am not a financial advisor, that this should not construed as financial advice, and that this article is just meant to provide a general introduction to how expats can invest their money. The more options that you have to invest your money, the better, so it will behoove you to look into all possible opportunities wherever you live, no matter what your county of citizenship might be.

For starters, the most obvious form of investment that most people overlook is investing in your own business. If you have a side hustle or even your very own business that you derive your income and livelihood from, you have more control over operations, finances, and of course, the vision and mission of the business. Therefore, you give yourself a better chance to be the architect of your own future, than if you remained a company employee. Further, you might be able to take advantage of some niche in a foreign country and tap into an unmet need, generating great profits.

If you are not interested in a business that you own or operate, either because of large capital requirements, time constraints, or you do not wish to take on that much risk, you might want to own a portfolio of real estate assets. It is pretty much a given that there will always be people in this world who will be renters, and so there is a demand for rental property, which will help you generate rental income. 

SEE ALSO: Some Reasons to Invest Offshore 

If you get into a growing country/market early and the value of the property increases over time, it will be worthwhile to invest in it. Further, while your rental property is increasing in value, you are also hopefully deriving some good cash flow from monthly operations. This double benefit of capital appreciation and cash flow is what makes real estate a good way for expats to build their wealth. Another good reason to invest in real estate is because of your ability to diversify your assets, which is what is always recommended by financial planners. Adding real estate to your portfolio of assets has the ability to lower the chance that your portfolio becomes susceptible to the whims of the market.

Here are three other ways that anyone, especially expats, can invest their money in ways other than stocks and bonds:

  • P2P (Peer to Peer Lending) 
  • Equity Crowdfunding
  • REIT’s or real estate investment trusts

There are online P2P services that offer loans to businesses, for personal use or anything else. You might be wondering how P2P loans are different from getting a loan from a bank. There is no bank when you are involved with this kind of thing. Your money is pooled with the money from other investors and with these investors you make a loan to the client(s), asking for the funds. Then, you will get a fixed amount of repayments each month and part of this repayment includes the interest that you would be owed. However, there is a risk involved with P2P lending. The risk is that you would be lending money to people that may not have been able to get a loan from a bank, or are unable to go through the traditional ways of getting a loan. This could increase the possibility that they could end up defaulting on the loan.

Equity Crowdfunding is another way that you can invest your money as an expat. If you do not want to own your own business for whatever reason, you can choose to own part of someone else’s company. Companies that are in the process of starting up have the option of offering shares of their companies on equity crowdfunding websites. If you choose to invest in a company, you own part of that company, and therefore, if the company succeeds financially, you will reap some benefits. However, if the company fails, you may lose all or part of your money.

REITs, or real estate investment trusts, is when a company owns and typically operates real estate which generates income.  Note that this is different from when an individual owns real estate for the purposes of generating income. REITs are part of a fixed-income portfolio or a part of the company’s portfolio. There is another major difference in a REIT compared to other real estate companies and that is that a REIT does not engage in the development in real estate properties to resell them. Instead, when there is an REIT that is established, properties are bought and developed so that the company can include them as part of its portfolio. REITs provide a way for you as an investor to earn a share of the income that is produced through commercial real estate without you having to go and buy commercial real estate.

No matter which country you are currently living in, there may be various options available to you. While equities are an attractive investment given the ease of investing and lower capital requirements, you might want to look into other options, such as those described above. After all, at some point in the past, you decided to leave the shores of your home country and become an expat. Therefore, you owe it to yourself to look into what financial adventures might be awaiting you in foreign lands.

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