How to Invest in REITs
In 1960, the United States Congress established real estate investment trusts (REITs). REITs were designed to allow individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties, which include apartment complexes, office buildings, retail centers, warehouses, self-storage facilities, timberland, health care facilities, hotels and, more recently, data centers, cell towers, energy pipelines and more. A REIT works by leasing space and collecting rents on the properties, then distributing the income as dividends to shareholders.
REITs are popular among investors because of their potentially higher total returns and/or lower overall risk. REITs can also generate dividend income along with capital appreciation, which makes them an excellent option for diversifying a portfolio of stocks, bonds and cash. Between 1990 and 2010, the average annual return on REIT investments was 9.9 percent—second only to mid-cap stocks (10.3 percent) over that same period.
What are the Different Types of REITs?
Hybrid REITs involve both the physical rental property and its mortgage loan. The portfolio can be weighted to represent more property or more mortgage holdings, depending on the investment focus.
This type of REIT offers shares that are publicly traded on a national securities exchange and regulated by the U.S. Securities and Exchange Commission (SEC).
These shares are also registered with the SEC but are not traded on national securities exchanges. Public non-traded REITs tend to be more stable but less liquid than publicly traded REITs.
Private REITs are not registered with the SEC and are not traded on the national securities exchanges. They are sold solely to a select list of investors.