REITs (Real Estate Investment Trust) is an important aspect to the real estate industry as it allows investors to earn dividends from real estate investments without having to buy, and manage any properties themselves. What exactly is REITs? REITs is a company that owns, operates, or finances income-generating real estate. REITs allows anyone to invest in real estate asset portfolios through the purchase of individual company stock. These stockholders will then be able to earn a share of the income produced the real estate investment. There are many types of properties included in a REIT portfolio including but not limited to offices, apartment building, health-care centres and hotels.
Why is REITs important?
REITS has had an impressive track record with attractive total return performance for the past 45 years and has continued growing strong ever since. Why is that? From past records, we can see that their total returns are based off on high, steady dividend income as well as long term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of REIT-based real estate investment.
Pros and Cons of REITs
As with all other investments and projects, REITs also has its respective advantage and disadvantages. These are listed as below:
REITs are easy to buy, sell and trade on public exchanges and therefore can provide better liquidity. This is a feature that mitigates some of the traditional drawbacks of real estate. In terms of its performance, REITs can offer attractive risk-adjusted returns and stable cash flow. A real estate presence can also be good for a portfolio because it provides diversification and higher than average dividend-based income.
On the downside, REITs don’t offer much in terms of capital appreciation and thus suffers from low growth. As part of their structure, they must pay 90% of income back to investors. So, only 10% of taxable income can be reinvested back into the REIT to buy new holdings. Other negatives are that REIT dividends are taxed as regular income, and some REITs have high management and transaction fees. Furthermore, REITs are also subjected to market risk.
REITs for HDAO NFT Minting System
REITs is one of the use cases provided by HDAO’s NFT Minting System along with rental income sharing and an NFT marketplace. The ERC-20 tokens generated by HyperDAO’s portfolio of NFTs which are backed by real-world assets can be combined to form an income generating basket of properties. This will allow a smart-contract REIT (Real Estate Investment Trust) to be created. REITs are particularly useful for investors who want to mitigate risk by diversifying their real estate investments globally. The REIT is also tokenized which makes it convenient for trading and transacting. The REIT can be made up of whole asset-backed NFTs (which in this case, would not require ERC-20 sub tokens) or portions of asset-backed NFTs (which would mean it comprised of different ERC-20 sub tokens of NFTs); this offers tremendous flexibility and customization for investors. In this way, REIT owners have the rights to the cash flows generated by multiple properties instead of just one.