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?

Real estate investment trusts fit into two broad categories that include equity REITs and mortgage REITs. Equity REITs operate and own real estate that produces income, such as office buildings or apartments.

Mortgage REITs, on the other hand, invest in mortgages or mortgage-backed securities. Most mortgage REITs tend to specialize in residential or commercial mortgages.

Additionally, there are four other REIT variations:

Hybrid REIT

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.

Publicly traded REIT

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).

Public non-traded REIT

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 REIT

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.

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How do I Invest in a REIT?

An individual can purchase shares in a publicly traded REIT via the major stock exchanges, just as they would any other public stock. REIT mutual fund and exchange-traded fund (ETF) shares can also be purchased this way. Further, an individual can invest in public non-listed REITs and private REITs using a broker.

Interestingly, millions of Americans are already invested in REITs and don’t know it. This is because REITs are often included in retirement investment portfolios and other mutual funds. Like other publicly traded investments, the price of REIT shares change according to the market over the course of a trading day. Therefore, certain considerations should be made before making an investment:

  • Anticipated growth in earnings per share
  • Anticipated total return from the stock, estimated from the expected price change and the prevailing dividend yield
  • Current dividend yields relative to other yield-oriented investments (e.g., bonds, utility stocks and other high-income investments)
  • Dividend payout ratios as a percent of REIT funds from operations (FFO)
  • Management quality and corporate structure
  • Underlying asset values of the real estate and/or mortgages and other assets

REITs That Invest in New Industrial Development

REITs that invest in new industrial development own and manage facilities. They also rent space in those properties to a variety of tenants. These REITs play an especially important part in e-commerce and play major roles in meeting today’s consumer demands for rapid delivery.

Examples of these types of REITs include Prologis, Inc.; EastGroup Properties, Inc.; Americold Realty Trust; and Terreno Realty Corporation, to name a few.

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