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REITs: A beginner's guide to earning passive income from real estate

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How Real Estate Investment Trusts work

REITs are a special type of publicly traded company, which focus on the management, rental, and sale of real estate. REITs are strictly regulated in Germany, as with any type of AG, and are relatively new. REITs are required to distribute a large portion of their profits to their shareholders, and must invest a minimum of 75% of their assets in real estate. German REITs must also primarily focus on commercial real estate, and can only include residential properties in their investment portfolio if they were built after 2006. REITs are designed for passive investment, meaning that buying and selling properties within a short period of time is not possible. Therefore, only up to half of the entire REIT portfolio can be exchanged every five years, and the entire portfolio must be exchanged after ten years.

Types of Real Estate Investment Trusts

There are two types of REITs: equity REITs and mortgage REITs. There is also a hybrid REIT that combines elements of both. An equity REIT invests in physical assets, which can include all types of real estate such as residential, office, retail, industrial, logistics, as well as forests, infrastructure, or agricultural land. Lease income generates the profits for equity REITs. With the mortgage variant, securities based on real estate are included in the portfolio, and the returns come from interest payments. It is also possible to combine real estate ETFs and REITs.

REITs are required to distribute 90 percent of their net income as dividends to their shareholders

Advantages of REITs

Compared to traditional corporations, a REIT is subject to much stricter regulations, which results in a lower investment risk than other forms of investment. In addition, it is possible to invest with less equity, which is a hurdle for many potential real estate buyers. This investment form provides an opportunity to participate in the real estate market without having to commit large amounts of capital. Furthermore, the effort required is lower since no property management, maintenance, or other management tasks are required, as with owning an actual property. REIT investments are particularly beneficial for investors who seek to diversify their investment in a specific type of real estate. Additionally, REIT investments offer a high cash flow, as 90 percent of profits are distributed as dividends, providing a higher return than traditional stocks. Moreover, there are no issue surcharges associated with REIT investments, as with buying fund shares, but only the usual fees and an overall expense ratio for management. The high transparency of REIT investments is another advantage since companies are required to disclose the distribution of individual shares.

How to invest in REITs

REIT stocks are particularly suitable for investment beginners who value safety in their investments because the risk of loss is lower and initial gains can be realized after only a few weeks. However, it is advisable to invest for years. Since the majority of investments are made in commercial real estate, it is also worthwhile to keep an eye on municipalities with high development potential. Numerous new commercial properties such as office buildings have been built in large cities in recent years. Especially in eastern Germany, there is great potential in cities like Leipzig. Places where large logistics centers for online retail are being built are also winners in terms of REIT stocks. In general, it is advisable to closely monitor the market before buying REITs. Since REIT companies are obliged to provide precise information about which part of their investment is going into which project, this is easily possible with this type of investment.

Written by:

Stefanie Aust, Gastautorin

Stefanie loves to put complex topics from the real estate world into understandable and inspiring words. Whether it's about the right financing, choosing the right type of flat, or a successful property search: Stefanie is happy to inform you.

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