Real estate investment trusts (REITs) make it possible for individuals to invest in real estate without actually having to purchase or manage properties themselves. REITs own and operate real estate assets like office buildings, shopping malls, apartments, hotels, storage units, etc. They offer investors an easy and low-cost way to earn income from real estate.
Types Of REITs
There are five main types of REITs:
Equity REITs: These own and operate real estate properties. They generate income from rent paid by tenants. Equity REITs offer the potential for dividends and property value appreciation over time.
Mortgage REITs: Instead of owning properties, mortgage REITs invest in mortgages and mortgage-backed securities. They earn income from interest payments, not rent. Mortgage REITs typically pay higher dividends but offer less opportunity for capital gains.
Hybrid REITs: These invest in real estate properties and mortgages, providing a mix of rental income and interest. Hybrid REITs aim to balance financial risks while maximizing total returns.
Public REITs: These issue shares that trade on major stock exchanges, like the NYSE and Nasdaq. Public REITs are easy to buy and sell, provide daily price transparency, and are large and financially stable. However, share prices can fluctuate significantly in the short term based on the broader stock and real estate markets.
Private REITs: These issue shares that do not trade on public exchanges. Private REITs typically require large initial investments and lock up your money for many years. Although less volatile than public REITs, private REITs are riskier, less transparent, and often charge higher fees.
Comparing REITs To Real Estate Syndications
REITs differ significantly from real estate syndications, another way investors buy into real estate assets. With real estate syndication vs REITs, the key differences are:
- REITs are corporations that issue publicly traded shares, while syndications are private placement deals.
- REITs invest in many properties to diversify risk, whereas syndications focus on a single property or limited portfolio.
- REIT shares are highly liquid, but syndication investments are usually locked up for years.
- REITs have professional management and pay out 90% of their taxable income as dividends. Syndications rely more on private sponsors and distribute less income currently.
How To Invest In REITs
There are several effective ways for individual investors to gain exposure to REITs:
Public REIT shares: You can buy equity and hybrid REITs on major stock exchanges, just as you would buy shares of Apple or IBM. Popular options include Simon Property Group (mall REIT), Welltower (healthcare REIT), and Crown Castle (cell tower REIT).
REIT ETFs: Exchange-traded funds like Vanguard Real Estate ETF (VNQ) provide instant diversification across hundreds of REITs. REIT ETFs charge low fees but may be concentrated in certain REITs or property sectors.
REIT mutual funds: Actively managed funds like Fidelity Real Estate Income Fund (FRIFX) aim for higher returns through stock selection. However, their returns tend to be similar to ETFs over the long run due to higher fees.
REIT-dedicated brokerages: A few brokers, like Stifel’s REIT Group and Fidelity’s Real Estate Services, specialize in helping investors build customized REIT portfolios. They can help select REITs that meet your specific investment objectives. However, the brokers charge advisory fees for their services.
To Wrap Up
REITs offer many benefits for real estate investors, including professional management, access to diverse commercial properties, and relatively high dividend yields. By understanding the different REIT options and how to invest in them, you can find REITs well-suited to your financial goals. And with a long-term buy-and-hold strategy, REITs may play an essential role in building your investment portfolio and wealth.