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A hybrid real estate investment trust (REIT) is a form of real estate investment combining the following two types of REITs: equity REITs and mortgage REITs.
An equity REIT is a relatively low-risk investment in which companies purchase properties and lease them to dependable tenants, securing an income stream that compounds dividends with an increase in property value.
Mortgage REITs borrow money at short-term interest rates to invest in long-term mortgages paying high-interest rates, which is a higher-risk investment. A hybrid REIT of the two evens out the risk level, making it safer for companies to invest.
This guide will give you a comprehensive breakdown of REITs, explain the pros and cons of different types of REITs, and recommend the three best REITs to invest in during 2023.
Hybrid REIT Definition
In brief, hybrid REITs combine the benefits and risks of mortgage-backed securities and equity REITs. They make it easier and safer for investors in real estate.
How Hybrid REITs Work
Here are some details about the origins, architecture, and application of hybrid REITS.
In 1960, President Eisenhower passed legislation broadening access to real estate properties so that average Americans could invest and reap benefits previously only available to wealthy and financial institutions.
The original goal of making commercial real estate investment opportunities accessible to all Americans remains at the center of the modern REIT infrastructure.
Companies typically purchase Hybrid REITs. As an individual investor, you can buy shares of hybrid REIT stocks through a broker with a publicly traded REIT company.
However, there are other possible avenues, such as purchasing REIT shares with a mutual fund.
The dividends create a steady income stream for individual investors from commercial real estate without them having to buy or manage the investment properties themselves.
Hybrid REIT structure
Federal law qualifies companies as REITs if they operate within specific guidelines, and 90 percent of the company’s taxable income must go to its shareholders through dividends.
More than half of its shares within the last half of a tax year cannot belong to five or fewer individuals. The company must also have a minimum of 100 shareholders after its first year in operation, a board of directors, and at least 75 percent of its assets in cash or real estate.
Moreover, 95 percent of its gross annual income must derive from real estate or mortgage securities. Property rent payments and loan interest payments form the income passed along to investors.
Most REITs base investment strategies on singular property types or locations, but some maintain a broad focus that isn’t bound by specific geography or industries.
Examples of Hybrid REITs
One example of a hybrid REIT agreement is a company that invests in single-tenant commercial properties. They may operate with both equity and mortgage REITs, be publicly listed in the stock market, and have individual investors who buy shares to help fund future assets.
This could be a company like Vanguard Real Estate, which allows investors to purchase stocks in the company. Such companies merge investor capital to acquire income-producing assets and bankroll developments and operations.
Benefits of Hybrid REITs
There are many advantages to investing in hybrid REITs.
Liquidity: Purchasing, developing or operating, and selling commercial properties is far less achievable than buying and selling REIT stock, particularly from publicly traded REITs.
Low volatility: REITs offer high-dividend payouts that mitigate volatility in comparison with traditional stocks. Other asset categories fluctuate significantly.
Risk-adjusted returns: There is an attractive measurement of profitability within a REIT portfolio because of factors like the capital appreciation of equity properties.
Portfolio diversification: Investing in a hybrid REIT is a wise way to add real estate to your investment portfolio by receiving distributions from larger companies without the headaches and nuances that accompany hands-on owning and operating commercial properties.
High-dividend yields: Hybrid REITs serve as secure passive income streams because they consistently lead to high yields that surpass total returns on traditional stock options for investors.
Transparency: REITs have to disclose financial information, including business plans and risks, like all publicly registered companies.
Unlike other companies, however, REITs have limits on the earnings they can keep and high dividends they must pay investors.
These factors require more frequent reports explaining and defending plans for funds, since REITs have to pursue backing from capital markets more often.
Longer cycle: Traditional bond and stock-market cycles last an average of just under six years, whereas the real estate market cycle typically lasts for a decade or more.
This extension in the market cycle offers more dividend benefits.
Inflation hedge: Hybrid REITs that work with commercial properties usually have legal protection allowing for rent rises to match inflation.
Risks of Hybrid REITs
Some of the disadvantages of investing in a hybrid REIT include market and occupancy risks, tax implications, and property-related risks, such as natural disasters and sensitive industries.
Moreover, non-traded REITs have additional cons.
Taxes: The government taxes REIT dividends as regular income. If the REITs you hold are in a standard brokerage account, you’ll pay substantial taxes on the dividends.
This is partially why many choose to hold REITs in tax-advantaged accounts like an IRA.
Property-specific risks: Commercial properties working in industries like hotels do poorly during low economic times. Since some hybrid REITs deal exclusively in the real estate sector, this could put your investment at risk due to trends and fluctuations.
If a natural occurrence, such as a flood, damages one of the properties that your REIT has a stake in, the property value can take a critical hit that hurts your share as well.
Occupancy and market risks: The real estate market has highs and lows depending on the location demand, changes in value, and occupancy, which can have negative consequences for a REIT.
3 Best Hybrid REITs to Invest in 2023
Here are our top picks for hybrid REITs that you can and should invest in during 2023.
Simon Property Group (SPG)
Simon Property Group (SPG) is a highly esteemed global real estate company that specializes in retail, dining, and entertainment commercial properties.
It boasts an extensive real estate portfolio that includes some of the most iconic retail properties in the world.
SPG’s leadership emphasizes sustainability practices and looking forward. The company closed its initial public offering in 1993 and now trades publicly.
- Property types: Shopping centers, restaurants, luxury stores, office buildings, hotels, community centers, self-storage solutions
- Markets include: North America, Europe, Asia
- Best for: Beginner investors and short-term investors
Urban Edge Properties (UE)
Urban Edge Properties (UE) is a retail-focused hybrid with a public REITs trade system. The company has a diverse management team and focuses on improving shopping centers in urban communities.
- Property types: Shopping centers
- Markets include: California, New Jersey, Virginia, New Hampshire, South Carolina, Puerto Rico, Massachusetts, Maryland, New York, Connecticut, Missouri, Pennsylvania
- Best for: Long-term investors and beginner investors
W.P. Carey, Inc. (WPC)
W.P. Carey, Inc. (WPC) has been investing in single-tenant commercial properties for almost 50 years. Its leases include rent-escalation agreements and cover a diverse range of occupant industries.
- Property types: Self-storage facilities, office buildings, warehouses, retail
- Markets include: United States, Europe
- Best for: long-term investors
How to Invest in Hybrid REITs
To invest in a hybrid REIT, it is best to use an online brokerage account or receive help from a financial or investment advisor specializing in REIT management.
Your retirement account through your employer might offer REIT stock options as well. There are also crowdfunding real estate investment platforms available that help individual investors gain stocks in collaboration with others.
Is a Hybrid REIT a Good Investment?
Hybrid REITs are a good investment if you have long-term investment goals. With attractive dividends, transparency, liquidity, and diversification benefits, hybrid REITs are generally low-risk, high-reward investments.
If you think that a hybrid REIT may be the ideal investment for your financial portfolio, get in touch with a financial advisor, a stockbroker, or our real estate investing hub to learn more about how REITs can strengthen your finances.
Hybrid REIT FAQs
Do you have any additional questions about what hybrid REITs can do for your investments? Our FAQ section may have the answers.
What industries do hybrid REITs invest in?
Hybrid REITs invest in commercial real estate, such as apartment buildings, shopping centers, office buildings, self-storage solutions, healthcare, and hotels.
What is a good return when investing in a hybrid REIT?
Well-balanced REIT portfolios average annual returns of approximately 10.6 percent.