Summary
- REITs offer exposure to real estate without having to directly manage it.
- You can benefit from the appreciation of both the stock price and the underlying real estate investments. REITs usually pay dividends as well.
- Unbiased can connect you to a financial advisor to help select investments to help you meet your financial plan and investment goals.
What are REITs?
A real estate investment trust (REIT) is a company that owns and operates income-generating real estate, such as offices, rentals, hotels, shopping centers, and more. REITs are for investors who want exposure to real estate without the hassle of operating it.
REITs are often publicly traded and enable investors to share in the profits. Investors may see income from dividends, capital appreciation of stocks, and appreciation of the underlying real estate investments.
How do you invest in a REIT?
For most public REITs, investing is straightforward. REITs are listed on public exchanges and can be bought through many brokerages. Here are some basic steps to point you in the right direction.
Step one: Open a brokerage account
Before investing in a REIT, you’ll need a place to put it. If you don’t already have a brokerage account or a retirement account, open one. There are many excellent providers with access to REITs. Examples include Fidelity, Schwab, and Vanguard.
Step two: Link a bank account
Make sure you have money coming into your account to fund the trades you want to make. Link a bank account or create automatic transfers.
Step three: Choose your REITs
Research and choose REITs to invest in. Look at sectors you’re interested in, past performance, analyst ratings, and other investment research to make your decision.
Step four: Invest regularly
Once you’ve chosen the REIT, place your trade. Buy shares and other investments regularly to build your investment portfolio one piece at a time. It may grow faster than you expect.
How much do you need to invest in REITs?
REITs offer a unique opportunity to invest with fewer dollars than traditional real estate investments.
You would need tens or hundreds of thousands of dollars for a down payment on physical property, but with an REIT, you can invest for as little as the share price of an REIT.
Many brokerages also offer fractional share investing, so investing with $1 is possible.
Why should you invest in REITs?
Investing in REITs depends on your goals, risk tolerance, and investment horizon. Like all investment decisions, it should fit into your financial plan. Some of the reasons investors consider REITs include the following:
Income
REITs can generate passive income for your investment portfolio. REITs are required to distribute 90% of their profit as dividends to investors.
Portfolio Diversification
REITs don’t always move with market funds and may help reduce volatility. REITs are a separate asset class that may help diversify your investment portfolio.
Hedge against inflation
An REIT can help hedge against inflation while providing income. Rents and values tend to follow the increase in market prices, which in turn support REIT dividends and the value of the underlying real estate investments.
Performance
REITs have a strong performance record for dividends and price appreciation. They are professionally managed and aim to earn money for shareholders with strategic real estate investments.
What are the pros and cons of investing in REITs?
Investing in REITs has some pros and cons to consider.
Pros
- Don’t need to own physical real estate.
- Low barrier to entry.
- Easy to trade and highly liquid.
- Strong appreciation and return potential.
- Helps diversify your portfolio with an investment that doesn’t move in lockstep with the market.
- Generates passive income.
- Underlying assets are tangible.
Cons
- Investors don’t experience the full appreciation of a property or real estate business like they would if they were the sole investor.
- REITs rise and fall with market fluctuations.
- REITs can be sensitive to interest rate movements.
- Potentially high fees come in the form of annual management fees, high upfront fees, or sales commissions.
- Dividends are taxed as ordinary income.
- Some REITs may have a narrow geographic focus where properties are only held in a specific area.
What are the main types of REITs?
There are four main types of REITs to invest in. Most investors find publicly traded equity REITs are sufficient, but there are other options as well.
Equity REITs
Equity REITs are long-term, publicly traded investments where rent and property sales produce profit. REITs own real estate across a variety of sectors, including offices, apartments, data centers, assisted living centers, retailers, and other commercial real estate. They are required to distribute 90% of their income to shareholders as dividends.
Mortgage REITs (mREITs)
The goal of mortgage REITs is to make money from interest payments by investing in mortgages and mortgage-backed securities.
Public, non-listed REITs (PNLRs)
PNLRs are registered with the SEC, but do not trade on an exchange. They operate like publicly traded REITs, except when it comes to redemption restrictions, which make them less liquid.
Private REITs
These are REITs not available on an exchange fund and not required to be registered with the SEC. They’re generally only available to qualified institutional buyers.
Bottom line
Investing in REITs is easier than you think. You can buy shares of an REIT like you would many other funds and benefit from real estate without having to manage it yourself.
Whether it deserves a spot in your portfolio should be a question of how REITs can help meet your goals. A professional financial advisor can offer guidance and expertise on your investment portfolio.
Unbiased can connect you to a financial advisor to answer all your questions today.