While owning a piece of property may have been the go-to investment strategy for centuries, the costs and risks involved can be a bit daunting. Enter REITs – the savvy investor’s answer to traditional real estate investing.
REITs, or real estate investment trusts, have revolutionized the way people invest in property. They offer all the benefits of owning a slice of the real estate pie, without the headaches and hassles of managing properties yourself. With REITs, you can get in on the action and potentially earn a solid return on your investment without breaking the bank or losing sleep.
So, whether you’re a seasoned investor looking to diversify your portfolio, or a newcomer to the investment game, investing in REITs might just be the key to unlocking your financial goals. In this article, we’ll explore the ins and outs of investing in REITs and share some tips to help you get started. Let’s dive in!
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What is a REIT?
REITs are an innovative investment vehicle that allow you to invest in income-producing real estate without the hassle of buying, managing or maintaining properties. These companies own and operate a diverse range of real estate assets such as apartments, self-storage facilities, malls, hotels and warehouses.
But why invest in REITs? The answer is simple – they offer a compelling combination of regular income streams and potential for long-term capital appreciation. The most reliable REITs have a proven track record of paying large and growing dividends, making them a popular choice for savvy investors seeking reliable sources of passive income.
However, it’s important to note that the risks associated with REITs can vary depending on the type of assets they invest in. For instance, investing in retail REITs might carry higher risk due to the shift towards online shopping. On the other hand, investing in healthcare or data center REITs might offer a more stable income stream.
How do REITs work?
Established by Congress in 1960, REITs were created to allow individual investors to own a portion of large-scale real estate companies, just like they could own a piece of any other business.
The IRS has set specific standards for REITs, which include returning at least 90% of taxable income to shareholders in the form of dividends each year. This has proven to be a major draw for investors looking to get in on the action, especially since REITs invest at least 75% of their assets in real estate or cash, and receive 75% of their gross income from real estate-related sources.
In addition, REITs must have a minimum of 100 shareholders after their first year of existence, and no more than 50% of shares can be held by five or fewer individuals during the second half of the taxable year.
By following these guidelines, REITs don’t have to pay taxes at the corporate level, allowing them to fund real estate projects more affordably than non-REIT companies can. This means that over time, REITs can grow and generate even larger dividends for their investors.
Types of REIT Stocks
With so many REITs out there, how do you choose the right one? Let’s explore the three main types of REITs and what sets them apart.
Equity REITs: Building Wealth Brick by Brick
Equity REITs are the most common type of REIT, and for good reason. By investing in an equity REIT, you become a partial owner of the properties it owns and operates. These REITs collect rent from tenants and handle property management tasks such as maintenance, repairs, and upgrades.
Equity REITs may specialize in a particular type of real estate, such as residential, retail, healthcare, or office space. By investing in equity REITs, you can diversify your portfolio and potentially earn attractive returns from rental income and property value appreciation.
Mortgage REITs: Lending a Hand, Taking on Risk
Mortgage REITs, on the other hand, don’t own physical property. Instead, they invest in mortgages, either by originating them themselves or by purchasing them from banks and other financial institutions. Some mortgage REITs also invest in mortgage-backed securities (MBS).
While mortgage REITs may offer higher dividend yields than equity REITs, they also come with higher risk. Because they’re exposed to the credit risk of borrowers, mortgage REITs can be more volatile and sensitive to changes in interest rates.
Hybrid REITs: Best of Both Worlds
If you’re looking for the best of both worlds, hybrid REITs may be the way to go. As the name suggests, hybrid REITs invest in a combination of real estate assets and mortgages.
By blending equity and debt investments, hybrid REITs can provide a more balanced risk-return profile. They may also offer greater diversification within a single investment, making them an attractive option for investors seeking a middle ground.
How to Invest in Public REITs
Investing in public REITs is an easy and accessible way to diversify your investment portfolio and potentially generate attractive returns.
To get started, you can open an online brokerage account with a reputable broker that offers REITs as an investment option. Many brokers have screener tools that allow you to evaluate the historical performance, returns, and dividends generated by REITs. This can help you make informed decisions about which REITs to invest in.
It’s also important to research the management team behind a REIT. Since a REIT is a managed pool of assets, assessing the managers’ track record is key to understanding whether the REIT is a good buy and whether the management team is worth its fees. Look for REITs with experienced and reputable management teams that have a proven track record of generating returns for their investors.
Publicly traded REITs may have minimum purchase requirements as low as the price of one share, and some brokers offer fractional share investing, which allows you to invest as little as $5 or less. This means that public REITs are accessible to almost any investor, regardless of their budget.
Another advantage of investing in public REITs is that they can be bought and sold on stock exchanges whenever the markets are open, making it easy to access the cash value of your investment at almost any time. Plus, REITs typically offer attractive dividends, making them a popular choice for income-seeking investors.
How to Invest in Public Non-Traded REITs
Finding public non-traded REITs on your online brokerage’s trading platform may prove difficult. Instead, you may need to purchase shares directly from the REIT company itself or through a third-party broker-dealer firm.
Don’t worry, though! Anyone can invest in these REITs, but you should keep in mind that public non-traded REITs often have minimum investment requirements of $1,000 to $2,500.
If purchasing directly from the REIT company or through a broker-dealer firm seems too complicated, there is another option: crowdfunding real estate investing platforms. DiversyFund, Fundrise, and Realty Mogul are some examples of these platforms that allow you to invest in public non-traded REITs.
Keep in mind that these platforms typically require investors to commit to real estate investments for longer periods of time, often up to five years or more.
How to Invest in Private REITs
Private ETFs offer a unique opportunity to invest in assets that are not available through traditional public markets. However, as with any investment, it’s important to understand the risks and potential rewards before diving in. Here are some key things to keep in mind if you’re considering investing in private ETFs.
High minimum purchase amounts can be a barrier to entry for many investors, but this exclusivity can also make private ETFs more attractive. They are often only available to accredited investors, giving you the chance to invest alongside other high net worth individuals. Private ETFs are typically sold through broker-dealers or by wealth managers, who can provide personalized investment advice and management services.
One important factor to consider is liquidity. Private ETFs can be highly illiquid, meaning that it may be difficult to sell your holdings at certain times of the year. This lack of liquidity can also mean that there is limited information available on the fund’s holdings or performance, which can be concerning for investors with limited risk tolerance. As such, it is crucial to do your research and fully understand the potential risks before investing.
In addition to the risk of illiquidity, private ETFs can also come with high management fees and various sales fees, which can eat into your returns. However, these fees may be worth it if the fund’s returns are strong enough to justify the costs. Again, it is essential to carefully review the fund’s prospectus and seek professional advice before investing.
Should You Buy REITs?
If you’re looking for steady dividend income and a way to add real estate exposure to your portfolio, then the answer is a resounding yes.
Unlike traditional stocks, REITs are required by law to distribute at least 90% of their taxable income as dividends to shareholders. This means that you can enjoy regular payouts, often on a quarterly basis.
However, it’s important to note that REITs may not be the best choice if you’re looking for rapid growth in share prices. While the value of the properties owned by a REIT may appreciate over time, share prices themselves may not change significantly. As a result, REITs are often more suited for dividend investing rather than growth investing.
But don’t let that discourage you. The fact that REITs offer regular dividend payouts can be a huge advantage, especially if you’re investing in tax-advantaged accounts like IRAs, 401(k)s, or HSAs. Because much of the value growth of REITs comes through dividend income, you won’t have to worry about capital gains taxes eating into your profits.