How to invest in REITs to build your portfolio
You want to invest in real estate but you cannot afford to buy a property or you have no desire to own? There is a way and it’s called REIT investments.
Investing in a REIT, or real estate investment trust, is a way to own equity in real estate without the traditional tasks of maintaining, taking rents, or finding tenants.
A REIT involves buying shares of a fund and receiving a portion of the profits as passive income.
Many REITs are traded on major stock exchanges and can benefit investors in several ways.
“(Investing in REITs) takes the headaches and heartaches out of direct ownership of commercial real estate,” said Abby McCarthy, senior vice president of investment affairs for the National Association of Real Estate Investment. Trusts – called Nareit – based in Washington, DC.
What is a REIT?
A REIT – which stands for real estate investment trust and rhymes with “soft” – is a company that owns, operates or finances real estate in a variety of income-producing sectors.
By investing, you give REITs money to buy properties such as apartment complexes, industrial warehouses and small office buildings and in return you and other investors get a portion of the profits from the rental income. Shareholders buy shares of the REIT, much like buying shares.
In general, REITs are liquid investments, which means that investors can get in and out of them quite quickly and frequently. This is different from owning traditional real estate where an investor cannot usually decide whether to buy or unload a property and receive the money immediately.
How to invest in a REIT
To invest in a REIT, all you have to do is buy a stock in one of them, just like you would any other stock. Like stocks, there are even REIT mutual funds and exchange-traded funds. They include many REITs, so you invest in multiple REITs at once.
“It’s as easy as opening a brokerage account or accessing your IRA, researching the REIT and sending an order to your financial advisor or clicking buy,” said Ross Mayfield. , investment strategy analyst for Baird.
A financial planner, investment advisor or broker can help you determine how much of your investment dollars you might want to invest in REITs and in which ones.
For many REITs, there is no minimum investment amount, although private REITs often have a minimum.
“For a stock, all you have to do is look at the stock price of the REIT you want to buy. It’s the same as buying a share of Apple. There may be a minimum to open an account or a minimum, especially if you are going to pay a commission, but there is no structural minimum to buy a share of a REIT,” he said.
Remember that through your 401(k) or other retirement plan, you may have already invested in REITs. Many pension plans are also invested in REITs. Check with your plan administrators.
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What do REITs own and invest in?
A main characteristic of a REIT is that it owns and operates income-generating properties. The types of properties that REITs invest in include:
- Offices: These can be buildings of various sizes ranging from business centers to skyscrapers and everything in between.
- Shops and shopping centers
- Apartment towers
- Forest land
- Self-storage buildings
- Medical and health care facilities: may include hospitals, doctor’s offices, laboratories, nursing facilities, nursing homes, etc.
- Cell towers
- Infrastructure like fiber, cables, energy pipelines.
- Accommodation, including hotels and resorts
“The common theme is that they all basically own structures or real estate that generate income in the form of rent, and then that income is then paid out to shareholders in the form of dividends,” McCarthy said.
Most REITs focus on a particular type of property, although some invest in a variety. This means that there are office REITs, industrial REITs, retail REITs, accommodation REITs, residential REITs, etc. Do you see the blackboard.
“The market has really changed as the economy, e-commerce and technology have grown. The parts of the real estate market that house those elements of the economy have grown with it. McCarthy explained.
So places like data centers, logistics centers, cell towers, and warehouses have seen phenomenal growth.
In 2000, the bulk of REITs were invested in residential, retail, industrial and office, McCarthy said. Today, the most important sector is cell towers.
Different types of REITs
Just as there are different types of investors and real estate, there are different types of REITs.
Some are publicly traded and registered with the United States Securities and Exchange Commission (SEC), while others are private.
- Equity REITs: Equity REITs represent the majority of REITs and are publicly traded and regulated by the SEC. Equity REITs own or operate income-producing real estate and generate income primarily through rental income. The REIT operates much like a landlord, collecting rents and reinvesting that money in the property. Investors buy shares of REITs, often listed on major stock exchanges. Equity REITs are very liquid. These are also known as public REITs.
- mREIT: Mortgage REITs – called mREITs – provide financing for income-producing real estate by holding mortgages and mortgage-backed securities and earning interest income. Investors can buy shares of mREIT, often on major stock exchanges. This type of REIT is often a little riskier than an equity REIT, but can pay higher dividends.
- Hybrid REITs: As the name suggests, hybrid REITs invest in both equity and mortgage REITs.
- PNLR: A PNLR is an unlisted public SIR. This type of REIT is registered with the SEC, but does not trade on national stock exchanges. They operate similarly to publicly traded equity REITs, but the frequency of liquidity varies.
- Private REITs: Private REITs or private placement REITs are not registered with the SEC and are not traded on national stock exchanges. Generally, only accredited investors (with high net worth) or institutional investors like large pension funds can enter this type of REIT.
Many people are already investing in REITs without even realizing it. Many 401(k) plans, pension plans, and other investment funds invest in REITs, including most target date funds where you choose the year closest to when you plan to retire .
Why invest in a REIT?
Historically, REITs can be a way to create a balanced investment portfolio. They are traditionally less volatile than stocks. McCarthy calls this a low correlation to the overall stock market because returns are driven primarily by the housing market, not the stock markets.
McCarthy said Nareit’s research shows the most successful portfolios have between 5% and 15% invested in REITs.
They offer competitive returns in the form of regular dividend income, but your initial investment amount, i.e. capital investment, may not grow much. This is because REITs can only reinvest 10% of their taxable income back into the REIT to buy new properties.
REITs periodically pay dividends to investors, which are often higher than stock dividends due to the requirement that REITs distribute at least 90% of their taxable income to shareholders.
Pro tip: The higher dividend income from REITs can benefit retirees and others who need an income stream to pay for living expenses.
“Income is probably what attracts people the most,” Baird’s Mayfield said, adding that many companies outside of REITs have either cut or eliminated dividends.
In many cases, REIT dividend income is taxable as regular income, which will affect income tax. This may be different from the number of other stock dividends that are taxed.
The fact that REIT shares can be sold quickly and liquidated like common stock is also an advantage of investing in a REIT over other types of real estate investments.
But be aware before making too many changes in your investment portfolio. Some REITs have high management and transaction fees, similar to other types of investments.
“You pay managers to manage a portfolio of properties the same way as in a mutual fund, you pay a manager to pick stocks and manage position size,” Mayfield explained.
Also keep in mind that although REITs have historically provided higher returns and outperformed some other types of investments, they are not without risk.
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Penny Hoarder contributor Tiffani Sherman is a Florida-based freelance journalist with more than 25 years of experience writing about finance, health, travel, and other topics.