A real estate investment trust, or REIT, is a security issued by a company that finances, owns or manages income-producing property. These investments were established by Congress in 1960 to permit everyday investors to access commercial real estate.
Since then, these investments have grown into a key cornerstone for real estate investors. They offer higher diversification and return potential without the hassle of managing tenants and repairs.
That said, not all REITs invest or perform equally. Before taking advantage of this unique asset class, ask yourself: What is a REIT?
REITs are companies that finance, own or manage income-producing real estate. These firms issue securities that trade like stock on major exchanges (think the NYSE).
Most REITs register with the SEC and receive special tax considerations that make them valuable to real estate investors. Due to their unique setup, they often pay higher dividend yields than many traditional investments.
Most REITs operate by leasing properties and collecting rent that’s then disseminated to shareholders as dividends. These properties may include shopping malls and hotels, residential properties, office buildings, warehouses or even cell towers.
But some REITs eschew physical property in favor of financing real estate transactions and collecting income from the interest generated.
To list as an REIT, the issuer must comply with specific guidelines, including:
Additionally, the REIT must meet certain organizational requirements, like:
You can sort REITs by three main criteria: income production, share trading or invested holdings.
Most REITs are publicly-traded equity REITs. Equity REITs own or manage income-producing real estate and primarily generate rent revenues.
mREITs, or mortgage REITs, finance real estate and pull revenues from interest on their investments. mREITs account for about one-tenth of all REITs on the market. Due to their specific nature, they may be more susceptible to interest rate fluctuations.
Hybrid REITs usually hold both equity and mortgage investments, providing more diversity in one basket.
Public REITs trade on major securities exchanges like stocks. Due to their higher volume, they’re considered highly liquid as far as a REIT goes. Public REITs are regulated by the SEC.
Public non-listed REITs (PNLRs) do register with the SEC but don’t trade on national stock exchanges. Typically, they offer less transparency and liquidity, as well as higher risk potential. However, because they’re less influenced by market fluctuation, their prices may be more stable.
Private REITs don’t trade on national exchanges or register with the SEC. These securities maintain high investment minimums typically only attainable by institutional or accredited investors. As a result, private REITs are considered illiquid investments.
As an asset class, REITs can invest in everything from apartments to cell towers. But most REITs specialize in a specific real estate sector or property type.
Commercial REITs invest in commercial spaces like offices, shopping malls, data warehouses and retailers. Generally, their income derives from long-term tenancy contracts. However, as the post-Covid work-from-home revolution continues, dozens of companies have reconsidered the actual floor space they need, making commercial REITs potentially tricky investments.
Residential REITs own and operate residential properties like multi-family apartment buildings, manufactured homes and student housing. Often, these REITs do well in markets where home affordability is relatively low and rental numbers are higher.
Healthcare REITs invest in real estate required by hospitals, medical centers, nursing facilities and retirement homes. This space is predicted to grow as the Boomer generation ages into the bracket where more specialized or extensive care is required.
REITs can play an important role in your portfolio due to their strong, stable dividends and some long-term capital appreciation potential. But, like all investments, REITs come with benefits and risks.
On one hand, REITs…
But on the other hand, REITs…
Nareit – an association that represents REITs – runs a full REIT database here. You can also find information on any SEC-registered REIT through the EDGAR database.
In these directories, you’ll find dozens upon dozens of REITs serving all sectors of the real estate community. A few of these REITs include:
Like all investments, REITs have their ups and downs. But overall, they’ve come out positive, often beating out major stock indexes like the S&P 500 and Russell 1000 based on long-term performance. Their steady dividend income allows REITs to deliver competitive returns.
Nareit maintains a list of historical REIT returns based on a series of REIT-focused indexes. Below, you can see the 1-, 5-, 10- and 20-year returns on each primary index.
Investing in REITs is quite similar to investing in regular stocks. Most brokerage accounts, as well as some individual retirement accounts (IRAs), permit REIT investing.
Simply log into your account and purchase shares of your preferred REIT through your account or broker. You can also invest in a REIT mutual fund or REIT ETF for instant diversification.
If you want to buy shares of a non-traded REIT, you can do so through a financial advisor or broker who participates in the non-traded REIT market.
Increasingly, REITs are also being offered in employer-sponsored benefit plans, such as 401(k)s.
REITs offer everyday investors a novel vehicle for investing in real estate without the hassle of buying property, completing repairs or handling unruly tenants. While they offer higher-than-average dividend yields and instant diversification, they’re not without their downsides. (Namely, the potential for higher taxes and market-specific risks.)
A paper clip REIT “clips” together two entities: one that owns properties, and ones that manages properties. By combining forces, these REITs increase tax advantages while allowing greater operational control not typically allowed under a trust. However, they may face stricter regulations that could hinder their potential.
By law, REITs are required to pay at least 90% of their taxable profits as shareholder dividends. While this requirement allows REITs to avoid being “double taxed” on dividends, shareholders often face higher taxes on their profits as a result.
Investing in REITs can provide portfolio diversification, strong dividend and capital appreciation potential, and expose investors to lucrative real estate deals. However, the REIT market bears its own risks, and those dividends don’t come tax-free.
The “safety” of an REIT during any economic condition is relative. For example, hospitality properties often suffer during recessions, and so hospitality-based REITs do, too. On the other hand, certain retailers and utilities may see above-average profits during recessions, which could extend to REIT returns.
As with any investment, REITs come with loss potential. For instance, equity REITs can lose their value in turbulent markets, while mREITs are highly susceptible to rising interest rates.
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