Are you interested in diversifying your investment portfolio through real estate but unsure how to do it without buying physical properties? Real Estate Investment Trusts (REITs) could be your answer. Established in 1960 by the United States Congress, REITs offer individual investors a way to invest in large-scale, income-producing real estate.
In simple terms, a REIT is a way to invest in real estate without having to buy and manage the properties yourself. A REIT is managed by a team of individuals who are responsible for making investment decisions - they are subject to regulation by the SEC.
👉 Check out our detailed guide on "What is a REIT?"
A REIT is a company that owns and operates income-producing real estate. REITs can invest in a variety of property types, including apartments, office buildings, shopping malls, and industrial properties. REITs are like any other publicly traded company, and investors can buy and sell REIT shares on stock exchanges.
REITs aren't just any ordinary investment; they have unique characteristics that distinguish them from stocks or bonds.
REITs can offer potentially higher total returns and/or lower overall risk. They generate dividend income along with capital appreciation, providing an excellent way to diversify a portfolio that may already include stocks, bonds, and cash.
However, REIT investing is not without its complications. Factors such as market volatility, interest rate sensitivity, and management quality all need careful consideration.
What makes REITs so unique to investors are two main factors: (1) Exposure to real estate without actively managing properties, trying to get tenants, or attempt to invest into Airbnb’s, and (2) Income from distributions.
REITs span a variety of sectors, from traditional avenues like residential and commercial properties to specialized sectors like data centers, cell towers, and energy pipelines.
There are two main types of REITs:
1. Equity REITs, which operate and own income-producing real estate.
2. Mortgage REITs, which invest in property mortgages or mortgage-backed securities.
3. Hybrid REIT: A REIT that invests in both rental properties and mortgages.
4. Publicly Traded REIT: A REIT whose shares are traded on a stock exchange.
5. Public Non-Traded REIT: A REIT whose shares are not traded on a stock exchange, but are registered with the SEC.
6. Private REIT: A REIT whose shares are not traded on a stock exchange and are not registered with the SEC.
New sectors like data centers and renewable energy are gaining prominence in the REIT universe, and there are companies that specialize in new industrial development to meet consumer demands in e-commerce, cloud computing, and more.
Knowing what a REIT is and how they operate is just part of the battle.
The next step is to actually invest.
Investing in REITs is as straightforward as buying shares in any other public stock, and there are usually no minimum investment requirements.
REIT shares can be bought on major stock exchanges, through REIT mutual funds, and exchange-traded funds (ETFs). Public non-listed REITs and Private REITs require a broker for investment. We do not endorse any trading platforms in particular, but there are many options out there.
Should you actively manage your REIT investments or is a REIT ETF sufficient? The truth is, investing in REITs is passive in nature because you’re not the one managing the real estate itself.
In the case for REITs, being an active investor really just means you’re buying and selling different types of REITS. However, many people who do this fail to realize the goal of a REIT: capital appreciation AND income through dividends.
Investing in REITs requires a critical eye. Here are the key areas to evaluate:
Pay close attention to metrics such as anticipated growth in earnings per share, dividend yield, dividend payout ratios as a percent of REIT Funds From Operations (FFO), and underlying asset values of the real estate.
Management quality and corporate structure can make or break your REIT investment. Make sure you do your homework in this area.
Every investment comes with risks, but identifying those risks can help you minimize them.
REITs are sensitive to interest rates, as rising interest rates can increase the cost of borrowing for REITs and make their properties less attractive to tenants. Thus, interest rates can greatly impact REIT performance.
REITs are also sensitive to the overall economy, as a recession can lead to decreased demand for commercial real estate and lower rents.
Some REITs may be less liquid than others, meaning that it may be more difficult to sell their shares quickly at a fair price.
REITs are also subject to property-specific risks, such as natural disasters, environmental liabilities, and tenant defaults.
It might be helpful to ask a financial advisor about protecting against these kind of risks.
REIT investors have a number of exit strategies available to them, depending on their individual circumstances and investment goals. Some of the most common exit strategies include:
The easiest way for an investor to exit or sell a REIT position is to simply sell it through the online platform they purchased it from.
Investing in REITs can be an excellent way to diversify your portfolio, generate dividend income, and even gain exposure to unique real estate deals in new sectors like renewable energy and e-commerce. By considering all the factors outlined in this guide, you're on the path to becoming an informed and savvy REIT investor and real estate investor.