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REITs let you invest in pre-vetted, large-scale real estate projects the same way you’d invest in shares of stock.
If you’re interested in real estate investing but don’t want to purchase and manage an investment property alone, real estate investment trusts (REITs) can be a great alternative. REITs offer the simplicity of stock shares with the benefit of real estate investment returns. Plus, you can choose from a number of vetted and planned projects in various locations.
Read on to learn about REITs, including how to invest in them and why you may want to include them in your investment portfolio.
Vault’s Viewpoint on REITs
- REITs are companies that invest in income-producing real estate such as residential, commercial and industrial property.
- Rather than buying real estate investments outright, investors can group together and purchase shares of REITs.
- Investors earn income when the properties held by a REIT collect rent from tenants.
What Is a REIT?
A REIT is a company that owns and manages various income-producing real estate investment properties. REITs are publicly traded and can hold residential property, retail and commercial property, raw land, developed land, timberland, infrastructure property (such as cell towers) and more. Shares of REITs are owned by a pool of investors who all benefit from the income that the REIT-owned properties produce.
How Do REITs Work?
REITs are responsible for vetting properties and planning projects. They manage not only the purchase of the land and buildings but also the development of the property, any necessary maintenance, the sourcing and management of tenants and even the eventual sale of the investment. As the property is leased out and rent is collected from tenants, those funds are distributed out to investors as dividends.
REIT shares are publicly traded so they can be bought or sold just like stocks. They can provide a steady income stream in the form of distributions—just like mutual fund dividends—so investors can enjoy regular income without the hassle or headache of maintaining a property on their own. In fact, REITs must distribute at least 90% of their taxable income to shareholders each year to meet IRS guidelines.
Types of REITs
There are three primary types of REITs: equity REITs, mortgage REITs and hybrid REITs.
The vast majority of REITs are equity REITs, which own real property and manage that asset to generate revenue. Mortgage REITs, don’t own or manage any actual real estate property and instead make money buying and originating mortgage loans to other borrowers or even buying mortgage-backed securities (MBS). Hybrid REITs use both equity and mortgage REIT strategies.
REITs can maintain assets in one or more types of real estate sectors. Here’s a look at some of the most common.
Healthcare REITs
Healthcare REITs focus on property within the healthcare sector. This includes hospitals, medical centers, laboratories, doctors’ offices and research centers. Healthcare REITs buy, develop and lease out these spaces to universities, medical groups, and even individual doctors.
Residential REITs
Residential REITs focus on housing types such as single-family homes, multi-family homes, apartment complexes, manufactured homes, student housing and condominiums.
Retail REITs
About one-quarter of all REITs in the United States today fall into the retail REIT category. These companies hold properties such as strip or shopping malls, outlets, freestanding retail centers and even grocery-anchored shopping complexes.
Office REITs
An office REIT is one that owns and manages office buildings such as skyscrapers, office parks and even some government agency headquarters. They provide working space to various companies that require their employees to be in the office.
Industrial REITs
Industrial REITs own and manage different types of industrial space such as warehouses, storage parks, distribution centers, production facilities, factories and manufacturing plants. These facilities can then be leased by various companies to house and handle their product manufacturing, storage and distribution needs.
Are REITs a Good Investment?
Real estate investing can be a great way to generate income and grow your portfolio for the future. But there are risks to consider. Here are some pros and cons of REITs to help you decide if it’s the right investment strategy for you.
Pros:
- Higher liquidity. A REIT allows you to invest in real estate with a much lower threshold. If you ever need your investment back, you can sell your shares much easier than selling an entire property.
- Wide variety of property and project types. While it would be difficult for a single investor to build an office complex, medical facility or industrial park, REITs make these types of investments accessible.
- Lower risk. Because REITs are responsible for vetting and managing projects, and multiple investors own shares in the company, the risk is spread out across many investors.
- No property or tenant management. REITs offer the best of both worlds: You can buy into real estate investments and earn income through property rental, but don’t have to deal with the hassle of finding and managing tenants or handling property repairs.
Cons:
- Lower risk equals lower returns. While you still earn distributions on the rents received, you split those returns with other investors. If you own your own rental property, all rents and growth would be yours to keep.
- No personal control over the investment. Since the REIT company is responsible for vetting, buying and managing property, investors have no say in how the property is maintained, who the tenants are or how much is charged for rent. If you don’t like feeling so hands-off with your investments, REITs might not be for you.
How to Invest in Real Estate Investment Trusts
With REITs, you can choose the type of real estate investment that interests you and then purchase shares on the public exchange like a mutual fund or individual stock. Because many REITs are publicly exchanged, you’ll first need to open and fund a brokerage account; there are many online brokerages that offer low (or no fees) and a wide range of investment options.
Once you’ve funded your account and chosen your REIT, you can place your order through the brokerage platform. After the order is complete, you’ll now be a REIT owner and can begin enjoying the regular income that REIT disbursem*nts provide. If you ever need or want to get rid of your REIT, you can simply request a sale of your shares at the current market price.
Frequently Asked Questions
How Much Money Do I Need to Invest in REITs?
Depending on the individual REIT, brokerage and number of shares you choose, you can often begin investing in real estate investment trusts with less than $100. If you want to invest more, you can buy additional REITs or shares of a single REIT, but the minimum required is notably less than investing in real estate on your own.
Can You Really Make Money from REITs?
Yes, investors can make money from REITs, earning regular returns (similar to dividends) based on the annual rents received and operation costs of the property. Of course, like all investments, REITs come with a level of risk and returns are never guaranteed.
How Do I Start Investing in REITs?
You can begin investing in REITs by purchasing your desired number of shares through a brokerage. Be sure to research each REIT to understand the type of property it holds, the plans for that property, the types of tenants it will allow and the projected returns.
As an enthusiast with a deep understanding of Real Estate Investment Trusts (REITs), I can provide insights into this investment vehicle and its various aspects.
REITs are companies that own, operate, or finance income-producing real estate across a range of property sectors. These can include residential, commercial, industrial, healthcare, and more. The concept of a REIT is to offer individual investors the opportunity to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves.
Types of REITs:
- Equity REITs: These own and operate income-generating real estate. They make money mainly through leasing space and collecting rents on the properties they own.
- Mortgage REITs (mREITs): They provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. They earn income from the interest on these financial assets.
- Hybrid REITs: These combine the investment strategies of both equity REITs and mortgage REITs.
How REITs Work:
- REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—dividends that are, in most cases, generated from rental income and sales of the properties.
- By law, a REIT must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
- REITs are typically publicly traded on major exchanges, and investors can buy and sell them like stocks.
Investment Characteristics and Benefits:
- Liquidity: Shares of publicly traded REITs offer liquidity, unlike physical real estate investments.
- Diversification: REITs invest in a wide range of real estate sectors, offering diversification benefits to an investment portfolio.
- Income and Total Returns: REITs are known for providing high dividend yields in addition to potential capital appreciation.
- Transparency: Publicly traded REITs are required to disclose extensive financial data, offering transparency to investors.
Risks and Considerations:
- Market Risk: Like stocks, the share prices of publicly traded REITs can fluctuate widely.
- Interest Rate Sensitivity: Particularly for mREITs, changes in interest rates can affect profits.
- Property-specific Risks: Economic downturns, changes in real estate market conditions, or poor management can affect individual REIT performance.
Investing in REITs: To invest in REITs, an investor typically needs a brokerage account. They can then purchase shares of a REIT, similar to how they would buy shares of any other public company. The minimum investment can be quite low, making it accessible to a wide range of investors.
Earning from REITs: Investors can earn money from REITs through dividends paid out from the income generated by the owned real estate properties. The amount of income depends on the type and performance of the REIT, as well as overall market conditions.
In summary, REITs offer a way for individuals to invest in a diversified portfolio of real estate assets, which can provide regular income and potential for capital appreciation. However, like all investments, they carry risks and should be considered in the context of an individual's overall investment strategy.
