Investing in Various Types of Real Estate Securities

When you invest in real estate property you are directly involved in the ownership and management of the property. If you are earning some income from the property such as family homes, office building, retail centers etc you have got to manage all the matters related to such a property. Rather than earning money by facing such hassles you have a better option of reaping good returns by way of investing in real estate securities. Real estate securities allow you to indirectly invest in real estate ventures that have a huge ability to earn high yields. The following types of real estate securities are worth investing in:

REITs (Real Estate Investment Trusts)

These are the corporations that invest in real estate and related assets like shopping centers, office buildings and mortgages secured by real estate. REITs are high yield vehicles that are extremely popular as they offer great opportunities for capital appreciation. They are organized in such a way that the income is taxed only once at the investor level. They are liable to pay at least 90% as dividend to the shareholder out of their net income. They specialize in the property types like malls, apartments etc. Long term capital appreciations, tax benefits and high yields make it a very good investment option.

Real Estate Mutual Funds

For a new investor Real Estate Mutual Funds are also a good option. These professional portfolio management funds also offer low overall risks . The real estate mutual funds primarily invest in REITs who, in turn, are involved in investing in a large variety of commercial and residential properties. You may feel the pinch though when you have to pay for the management fees and other expenses for fund management. However, for high yield funds such expenses seem to be minimal. If the economy slows down radically these REITs may take a hit and affect your portfolio to some extent.

Real Estate Limited partnerships

Limited partnerships allow investors to invest without having to incur a liability more than what has been invested. However, the investors who are called the limited partners get the tax benefits on the entire value of the property. The management is handled centrally by the general partner. The investor’s funds will be invested in the projects undertaken by the landlords and builders who will use these funds for their projects. Once the partnership is set up, the general partner looks after the daily operating decisions. If the general partners default on the partnership agreement or are negligent, the limited partners can take drastic action against them.

High Yield Private Mortgage Notes

The private mortgage notes are also high return securities. They are linked to the income producing real estate. They can be used by you for acquisitions or rehabilitation of the commercial and residential properties. You may be able to earn even 12% to 14% for the first trust deed positions and around 15% to 18% on second trust deed positions. The advantage is that you may close the loans in about three weeks or lesser time which otherwise requires more time for commercial mortgage loans. The investment is pretty secure as the lending decision is based on the real existing property. If the note is generating sufficient interest and the property fully secures the note then other factors like the credit history do not matter. The underwriting criteria available are different as compared to the institutional lenders and thus they allow the investors in such notes to get higher yields at lesser risks.

These different types of real estate securities provide good investment opportunities with lesser risks. However, they call for better management for better returns.

Written by: VD
Date Written: 02 July 2008
Reviewer Assigned by: David
Reviewed by: HS
Quality Control: AG
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Quality Control Completed on: 07/07/2008