Best-Performing REITS: How to Invest in Real Estate Investment Trusts

This means that over time, REITs can grow bigger and pay out even larger dividends. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. According to Nareit, dividends earned from REITs are taxed at the normal income tax rate, up to 37%. However, up to 20% of your dividend income for the year can actually be deducted when filing your taxes.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. Factors such as location, tenant quality, lease terms and property management can significantly impact the REIT’s performance. This in-depth article will provide a comprehensive understanding of REITs, their benefits, risks and essential factors to consider before investing. Minimum purchase amounts can run as high as $25,000 or more, which is why they’re generally only available to accredited investors. If you don’t want to go all in on an individual REIT, you can invest in a REIT mutual fund or a REIT ETF.

Office REITs

Approximately 150 million Americans live in households invested in REITs through their 401(k), IRAs, pension plans, and other investment funds. REIT — rhymes with “sweet”— stands for real estate investment trust, and its popularity is growing for investors who seek to expand their portfolio beyond publicly traded company stocks or mutual funds. A REIT is a company that invests in real estate assets that generate income that is paid out to investors in the form of dividends.

Conversely, during periods of economic expansion, REITs can benefit from increased property demand, rental rate growth and potential appreciation in property values. When interest rates rise, the borrowing costs for REITs increase, potentially impacting their profitability. What’s more, higher interest rates can make these dividend-yielding investments less attractive compared to fixed-income instruments. It’s important to note that certain types of REITs, such as those focused on long-term leases or those with fixed-rate mortgages, may be less sensitive to interest rate fluctuations. The easiest is to buy shares of publicly traded REITs through a brokerage account. An investor could purchase a diversified REIT or invest in several different REITs to build a diversified portfolio.

• MREITs (or mortgage REITs) don’t own real estate directly, instead they finance real estate and earn income from the interest on these investments.
• They generate revenue primarily from rental income and capital appreciation of their real estate holdings.
• Depending on the category of real estate a REIT is invested in, the investments can experience big swings due to economic sensitivity.
• This move made it easy for investors to buy and trade a diversified real-estate portfolio.
• PSA has been aggressively building its franchise, including its recently announced acquisition of Simply Self Storage.
• Publicly traded REITs, for example, can experience dips since their share price fluctuates with the stock market.

Dividends from REITs can be particularly appealing to income-oriented investors seeking a regular cash flow. Real Estate Investment Trusts are corporations that own and manage real estate. REITs issue units (much like stock shares) that gives investors access to the income generated by the REIT’s property portfolio.

This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. “Publicly traded REITs provide more liquidity, but non-traded REITs can potentially give you higher yields and may even be a potential inflation hedge,” Jhangiani explained. “So it depends on the investor’s goals and needs — do they want liquidity or lack of volatility? That is usually the determining factor.” As of 2022, REITs collectively hold more than half-a-million individual properties.

Diversify Your Portfolio

For instance, the best apartment markets tend to be where home affordability is low relative to the rest of the country. In places like New York and Los Angeles, the high cost of single homes forces more people to rent, which drives up the price landlords can charge each month. As a result, the biggest residential REITs tend to focus on large urban centers. In a poor economy, retail REITs with significant cash positions will be presented with opportunities to buy good real estate at distressed prices. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree. “Since REITs pay out most of their profits directly to investors in the form of dividends, there are potential tax consequences,” Garcia says.

They all work by assembling a portfolio of assets that back units that they publicly or privately issue to long-term investors through either an initial public offering[2] or private placement. They may raise additional capital through secondary offerings and other means. Each publicly traded unit has a price determined by supply and demand and a net asset value equal to the value of the portfolio divided by the number of outstanding units. Traders can trade publicly traded REIT units directly on exchanges and non-traded REIT units through brokers.

And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years. But like with any stock investment, the longer you plan to hold onto them, the more time you’ll have to recover from any huge dips in the market. When it comes to other types of investments like index funds and ETF’s, you’ll usually pay a management fee — the same holds true for investing in REITs.

Why invest in REITs?

They also usually carry much higher minimum investment requirements and can be much harder to offload. Robert DeHollander, CFP, a financial advisor in Greenville, SC, points to the cabin he owns in the mountains that was recently struck by lightning and burned to the ground. “If you’re going to own real estate directly, there’s a headache factor,” he says. “If you invest in a securitized REIT, you don’t have to deal with toilets, tenants, trash, fire, any of that stuff,” he says. Mortgage REITs are usually significantly more risky than their equity REIT cousins, and they tend to pay out higher dividends.

To avoid this, invest only in registered REITs, which can be identified using the SEC’s EDGAR tool. The other primary risk is choosing the wrong REIT, which might sound simplistic, but it’s about logic. As a result, investors might not want to invest in a REIT with exposure to a suburban mall. With Millennials preferring urban living for convenience and cost-saving purposes, urban shopping centers could be a better play. Hotel REITs are also referred to as lodging REITs or hospitality REITs. These companies own various types of hotels and resorts that are typically managed by 3rd-party operators.

However, through a collaboration with local authorities, Emirates REIT has been able to establish a platform enabling it to purchase properties anywhere in Dubai given a minimum of 51% of local ownership of its shares. This allows the company to diversify its portfolio with an efficient revenue https://1investing.in/ generating mix of properties in the prime locations of Dubai. Emirates REIT is the first REIT established within the United Arab Emirates. It is also the first REIT listed on NASDAQ Dubai and one of the five Shari’a compliant REIT in the world with a focus on Income-producing assets.

Mortgage REITs (mREITs) earn most, or all, of their income by investing in debt secured by real estate. These companies either originate or purchase mortgage loans and earn a profit from the interest payments. Investors can choose from several different types of REITs that vary based on the types of assets they invest in and how the shares are bought and sold. Aggressive investors may seek higher-growth REITs with potentially higher risks, while conservative investors may prefer more stable and income-focused REITs.

However, certain dividends from REITs may qualify for a preferential tax rate. Investors should consult with tax advisers to understand the tax implications of investing in a REIT. Unlike direct property ownership, which can be illiquid and involve a lengthy process for buying or selling, REITs trade on major stock exchanges. This liquidity allows investors to easily buy or sell their REIT holdings at market prices, enhancing flexibility and providing access to their invested capital when needed. Commonly referred to as S-REITs, there are more than 40 REITs listed on the Singapore Exchange,[40] with the latest REIT, Cromwell European REIT, listed on 30 November 2017.

How Real Estate Investment Trusts Work

At the same time, an investor who wants easy access to their money at any time might want to avoid investing in something that locks up their money for extended periods of time. Much like with any type of investment, REITs carry some amount of risk. Publicly traded REITs, for example, can experience dips since their share price fluctuates with the stock market. However, diversified and specialty REITs may hold different types of properties in their portfolios, such as a REIT that consists of both office and retail properties. And as the economy suffers, it’s reasonable to expect that some of these businesses working with ADC will also suffer. The greater financial strength of REITs allowed many of them the ability to purchase discounted property from distressed private investors during the recession.

Like any investment, REITs come with risks, including market volatility, interest rate fluctuations, and changes in the real estate market. Mortgage REITs provide financing for real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments. Ndustrial REITs own and manage industrial facilities and rent space in those properties to tenants. Some industrial REITs focus on specific types of properties, such as warehouses and distribution centers.

Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks. Perhaps the simplest way to build a diverse portfolio of REITs is to invest in a REIT exchange-traded fund (ETF). By investing in a real estate ETF you’re essentially paying a small fee to allow expert fund managers to choose which REITs to buy and when to sell. Industrial REITs invest in properties such as warehouses, distribution centers or factories.

Dividend growth has averaged 5.6% annually over five years and the payout is exceptionally conservative for a REIT at 52% of FFO. Investing in REITs can be a passive, income-producing alternative to buying property directly. However, investors shouldn’t be swayed by large dividend payments since REITs can underperform the market in a rising interest-rate environment. In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments.

• The owner of single-tenant, net-leased retail properties has delivered 33 consecutive dividend increases.
• REITs can be a good addition to your portfolio because they often perform independently of stock and bond markets.
• Infrastructure REITs own and manage infrastructure real estate and collect rent from tenants that occupy that real estate.
• Office REITs own and manage office real estate and rent space in those properties to tenants.
• Emirates REIT has a portfolio of over US$575.3 million consisting of a total of seven properties primarily focus on commercial and office space as of December 2014.

The listed REIT industry is focused on investment for the long-term, and has a track record of generating current income and using moderate leverage. The industry is widely monitored by asia’s poorest country analysts, investors and the financial media. Inflation Hedging
A key concern for many investors today is how to ensure enough income for a retirement period that could last for decades.

How do REITs Work?

The most common type, equity REITs own and operate income-generating properties. They generate revenue primarily from rental income and capital appreciation of their real estate holdings. Equity REITs cover a range of property types, such as commercial, residential, industrial and specialized sectors like health care and data centers. Real estate investment trusts make long-term investments by owning and leasing physical real estate or by purchasing mortgages or loans used to finance real estate. They aim to provide their investors with a steady stream of dividend income plus modest share price appreciation.

Within those market segments, some residential REITs also focus on specific geographical markets or classes of properties. Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation. Just because this type of REIT invests in mortgages instead of equity doesn’t mean it comes without risks. An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower. Generally, an increase in the demand for healthcare services (which should happen with an aging population) is good for healthcare real estate.

On the plus side, REITs are easy to buy and sell, as most trade on public exchanges—a feature that mitigates some of the traditional drawbacks of real estate. Performance-wise, REITs offer attractive risk-adjusted returns and stable cash flow. Also, a real estate presence can be good for a portfolio because it provides diversification and dividend-based income—and the dividends are often higher than you can achieve with other investments. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.