Real estate investment trusts (REITs) have upheld their reputation as excellent portfolio diversifiers as the real estate market continues to climb. And like any income-generating opportunity, REITs are assuming risk that merits some level of protection. But what types of risks should REITs be prepared for? Understanding the distinct risks associated with REITs is paramount to success as a REIT director or officer, and it requires a unique and specialized expertise. Weed Ross, enter stage right.
Below, we dive into the nitty gritty of REITs and insurance for REITs, so that you don’t have to scavenge the internet, comparing several different sites only to come out with a couple of vague definitions. That’s what we do here at Weed Ross—we just make things easier.
In this article we will cover how to:
- What Are REITs?
- Why Invest in REITs?
- Why Do REITs Need Insurance?
- What Does Insurance for REITs Cover?
What Are REITs?
REITs are companies or entities that own or operate a collection of profit generating real estate. These entities allow investors to pool capital together and invest in them and trade their investments like stocks. REITs invest in all different types of real estate properties, including (but not limited to) apartments, data centers, cell towers, retail buildings, hotels, offices, and more. Single-family-residence (SFR) REITs, for instance, have lately been the top-performing investment opportunities due to resilient economic performance. REITs were originally developed to model mutual funds, and the idea is to basically provide a more liquid method of investing in real estate, without buying the actual properties yourself. There are essentially three main types of REITs:
- Equity REITs: The most common type of REITs, that own and operate income-generating property and typically gain revenue by collecting rent
- Mortgage REITs: REITs that lend money to real estate owners through mortgages or loans, or through the acquisition of mortgage backed securities (a bundle of home loans)
- Hybrid REITs: REITs that combine both equity and mortgage strategies
Most people invest into publicly traded REITs through a broker, much like stocks. But there are well-over 225 different REITs to choose from, just in the United States, so there’s a lot of comparing and contrasting to do before you get started.
Why Invest in REITs?
REITs are total-return investments, meaning they provide high dividends and also capital gains over extended periods of time. REITs are required to divvy up 90% of their taxable income to shareholders annually, which is what makes their dividends so attractive. Their dividend yield is optimal both for people looking to retire and for retirees, as they offer the potential of a continuous stream of noteworthy income. Historically, REITs offer steady, long-term capital appreciation, which makes them rather intriguing to investors when looking to diversify their investment portfolios. REITs generally have little correlation to other types of investments, and for this reason, investors use them to balance out more aggressive endeavors and reduce their overall risk. Additionally, REITs provide a far more liquid strategy to invest in real estate, as opposed to buying the actual properties yourself.
As a recap, REITs are an appealing investment because they offer:
- Steady, long-term capital growth
- High dividends
- Good liquidity
- Portfolio diversification
Why Do REITs Need Insurance?
Insurance for REITs is essential because like any aspect of the real estate market, the REIT industry is constantly evolving financially and legally. As a REIT director or officer, and especially as a SFR REIT officer, you work diligently to consistently deliver a return for your investors. Whether you’re a publicly-traded REIT or a privately-held REIT, you’re assuming a large amount of risk that deserves adequate coverage and protection. Management liability concerns, the potential for data breaches, general liability issues, and property damage, are only a few of the threats that REITs face all the time.
All of these scenarios have the potential for substantial financial loss, and require appropriate protection. Like landlord insurance, there are numerous defenses that insurance agencies and businesses must explore when it comes to protecting and insuring REITs, based on their unique challenges. If you’re looking to cover your bases, the experts at Weed Ross offer years of experience working with REITs, and can elaborate on any of your concerns to ensure that your trust receives the most optimal coverage package available.
What Does Insurance for REITs Cover?
Insurance for REITs covers a variety of basic threats, but also some unique to the REIT industry. A comprehensive REIT insurance package will generally offer Management Liability, Commercial Property General Liability, Directors and Officers (D&O) Liability, Cybersecurity Coverages, Umbrella Liability and sometimes even more. The best insurance for REITs comes with extremely experienced underwriters who stay up to date with industry regulations and changes in the real estate world that introduce new threats of potential losses. Insurance for REITs should also cover business continuity plans so that your operation can continue to deliver returns despite market fluctuation or sudden industry changes.
As a recap, insurance for REITs typically offers:
- General liability
- Management liability
- Flexible property coverage
- D&O liability
- Cybersecurity protection
- Umbrella liability
- Business continuity planning
Weed Ross is a local insurance agency dedicated to providing the industry’s best insurance packages for any type of coverage. We work with numerous carriers, so you don’t have to sort it out on your own. Our experience spans a myriad of different insurance types, from homeowners insurance, to business insurance, to landlord insurance, and even brewery insurance. We’re an agency that wears a lot of hats, that’s for sure—and we’re here to make your life easier. However, if you still have questions regarding insurance for REITs, give us a shout today!