REIT Investing – Your 'in' to Real Estate

REIT stands for real estate investment trusts. They are companies that own or finance real estate for money-making purposes across a range of property sectors. You can invest in most REITs on the major stock exchanges in the same way that you would invest in other industries. When you become a stockholder of a REIT in this way, you earn a share of the income that is produced through that real estate investment. For most investors, REITs are considered a distinct asset class.

Types of REITs

To qualify as a REIT, a company must invest at least 75% of its total assets in real estate, cash, or U.S. Treasuries. All REITs must also comply with annual income tests, which are based on the gross income from all of the properties owned by the REIT. Before investing in REITs, you should know that there are two main types that you can invest in, as well as other types that are not available on national stock exchanges. You may also see REITs classified based on the types of properties that they own, including healthcare, industrial, office, and residential REITs.

Equity REITs

Equity REITs are the most common type of REIT. These are real estate companies that own real estate properties such as office buildings, apartment buildings, and retail spaces. These properties are owned with the purpose of leasing them to tenants. The real estate companies take the rental income made from these properties and pay out the bulk of their taxable income annually to shareholders as dividends.

Equity REIT investing

As an investor, you can expect to receive the bulk of your total returns to come in the form of dividends. These investments are typically beneficial if you’re looking to diversify your investment portfolio and if you’re looking to make income from your investments.

Mortgage REITs

Mortgage REITs (also known as mREITS) focus on mortgages and mortgage-backed securities. Think of it this way — mREITS make money by purchasing or originating mortgages or mortgage-backed securities for equity REITs. The mortgage REITs earn money from the interest that the equity REITs are paying for its mortgages. Some mREITs focus exclusively on residential mortgage markets, while others may focus on both residential and commercial mortgage markets.

Mortgage REITs investing

Similar to equity REITs, you can expect to get most of your investment return in the form of dividends. Mortgage REITs generally perform better when interest rates are increasing because interest rates make up the income of mREITS.

Public non-listed REITs

These REITs own, operate, or finance real estate, but are not listed on stock exchanges. Even so, they are held to the same IRS rules and are required to submit quarterly and yearly financial reports to the SEC.

Public non-listed REITs investing

Public-non listed REITs don’t offer the same liquidity that is provided by REITs that are listed on the stock exchange. Liquidity options may include share repurchase programs or secondary marketplace transactions. There also may be minimum holding periods for these types of investments.

Private REITs

Private REITs are not only not listed on national stock exchanges, but they’re also not registered with the SEC. Because of this, they are not subject to the same requirements as other REITs. Private REITs are pursuant to at least one exemption to the securities laws that are enforced by the SEC.

Private REITs investing

Generally speaking, private REIT shares are not liquid and any possible redemption programs for shares vary by company. In most cases, private REITs can only be sold to institutional investors or accredited investors.

Hybrid REITs

Hybrid REITs are a REIT that is a combination of equity and mortgage REITs, meaning that they own various types of properties as well as mortgage loans. The diversification across both types of investments allows hybrid REITs to reap the benefits of both types of REITs while minimizing their overall risk.

Hybrid REIT investing

While there aren’t very many hybrid REITs out there, the ones that do exist are set up to profit whether interest rates are rising or falling. This balanced approach can be beneficial to individual investors and result in an overall higher dividend income.

How to invest in REITs

Publicly traded REITs such as equity and mortgage REITs are listed on major stock exchanges and shares of them can be purchased through a broker. The cost of purchasing a share will vary, as will the brokerage fees that come along with purchasing through a broker. Publicly traded REITs can have minimum purchases that are low as the price of one share. In some cases, the minimum could even be as low as $5.
Non-traded REITs including public non-listed REITs may also be sold by a broker or a financial advisor. These can only be purchased by institutional investors, such as a large pension fund, or to an accredited investor. In most cases, accredited investors are defined as individuals that have a net worth of at least $1 million, or have an income that is greater than $200,000 over the two previous years. Private and/or non-traded REITs may be subject to investment minimums that can range anywhere from $500 to $100,000.

REIT companies to invest in

Brookfield Property Partners

Brookfield Property Partners is an equity REIT that owns, develops, manages, and leases commercial properties, including office, hospitality, and retail spaces. It focuses on acquiring high-quality real estate assets in markets that have proven to be both resilient and dynamic. This REIT’s objective is to “generate attractive long-term returns on equity of 12%-15% based on stable cash flows, asset appreciation, and annual distribution growth in-line with earnings growth.”

Equity Commonwealth

Equity Commonwealth is an internally managed and self-advised equity REIT that owns commercial office properties in major metropolitan areas throughout the United States. It aims to create value for its stakeholders by combining its real estate experience with rigorous risk management and a conservative balance sheet.

Ready Capital

Ready Capital is a mortgage REIT that provides residential mortgage lending through its subsidiary, GMFS Inc. As a non-bank real estate and small business lender, it has provided over $3 billion in capital nationwide. For multifamily or commercial real estate properties, it lends up to $45 million. For current and prospective investors, the company offers a dividend reinvestment plan. This REIT is externally managed by Waterfall Asset Management, LLC.

Redwood Trust

Redwood Trust is a mortgage REIT that handles both single and multifamily mortgages as well as business purpose investments. This mREIT invests in mortgages and expands liquidity which allows more Americans to own and rent homes. It’s one of the largest issuers of jumbo private-label mortgage-backed securities. The company also claims to provide essential liquidity for the market by providing reliable short-term and long-term financing to rental real estate investors.

Fundrise

If you’re looking to make long-term investments, Fundrise might be a good option for you. You don't need to be accredited. Instead, it’s a crowdfunding platform that lets you invest in electronic REITs and electronic real estate funds (eFunds). To use the platform, you’ll need at least a minimum investment of at least $500.

DiversyFund

Another platform that doesn't require a lot of funds is DiversyFund. This crowdfunding platform also has a minimum investment of $500 and doesn't charge you fees to become a REIT investor.

Taxes

When investing in REITs, it’s important to understand the tax implications. REIT investors are responsible for paying taxes on any capital gains they receive in connection with their investment. Your REIT dividends are considered ordinary income, so you’ll be taxed based on the tax rate that applies to whichever tax bracket that you’re in.

Ways to save

Fortunately, there are some ways that you can invest in REITs in a cost-effective way. Before you get started, it’s a good idea to gain familiarity with the real estate market, including any company’s real estate assets and types of properties.
You may want to consider looking into real estate mutual funds, which may otherwise be referred to as REIT mutual funds. These professionally managed pooled investments may invest in REIT stocks and/or other stocks related to real estate. You can also consider REIT ETFs, which usually provide consistent income through high-dividend yields. For a passive investment strategy, you could look into a REIT index fund. Index funds typically have lower expenses and fees.

Pros and cons of REIT investing

Pros
  • According to Nareit, REITs “typically provide high dividends plus the potential for moderate, long-term capital appreciation.”
  • REIT investing offers an opportunity to build a more diversified investment portfolio.
  • Investing in REITs allows you to gain access to real estate assets that may be out of your budget otherwise.
  • The cost of publicly-traded REITs is accessible to most investors, with minimums starting at as low as $5.
  • REITs have continuously proved their value over the past two decades, especially when compared to U.S. stocks. According to Nareit, “total returns of exchange-traded Equity REITs have usually averaged between 11.1 percent per year and 11.9 percent per year during the available 30-year historical periods, whereas total returns in the broad U.S. stock market have usually averaged between 10.6 percent per year and 11.1 percent per year.”
Cons
  • The volatility of REITs can be concerning for some, especially during periods of high interest rate fluctuation.
  • REIT dividends usually don’t meet the IRS definition of qualified dividends, so they end up being taxed at higher rates.
  • An individual REIT can be a risky investment since it most likely focuses on a specific property type, making it sensitive to economic weaknesses that affect that industry.

The bottom line

Like any type of investment, REIT investing can be beneficial for many, but it’s not for everyone. For an everyday investor, purchasing a piece of real estate is most likely out of reach. However, REITs allow investors that are interested in the real estate market to get involved at a much lower price. If you diversify your portfolio in a number of REITs or invest in an REIT ETF or mutual fund, you can dip your toe into several areas of the real estate market. For an investor looking to add some long-term investments to their portfolio, REITs can be beneficial because of its high dividends.
That being said, investing in REITs does come with some drawbacks. You may not see the same tax benefits from a REIT as you might with other types of investments. If you only invest in REITs within a single property type, you’re also opening yourself up to risks if that industry faces an economic downturn. Consulting with your tax and/or financial advisors can help you determine whether investing in REITs is right for you.

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