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How to Invest in REITs

A real estate investment trust (REIT) is a company that owns, maintains and manages investment-producing real estate properties. Investing in a publicly-traded REIT is an easy way to place your money into a portfolio of real estate investments the same way you would invest in a mutual fund or ETF.

What is an REIT?

Most REITs operate in a way that’s pretty straightforward and easy to understand—they purchase property and then rent or lease that property out to residents or business owners to generate income. That income is then paid out to investors in the form of dividends.

When you invest in an REIT, you invest in a real estate portfolio managed and planned by a company. An REIT is required to pay out at least 90% of its taxable income to shareholders—though may do whatever it can to reach the 100% mark.

REITs collectively own about $3 trillion worth of real estate in the United States, ranging from apartment complexes to storefronts to manufacturing buildings.

Steps to buy an REIT

Step 1: Understand the types of REITs

The first step to invest in real estate, or investing in REITs is to understand that there are many different types to choose from. Some of the most common REITs you’ll run into include:

Equity REITs

An equity REIT is the most common type of REIT and operates by purchasing properties and renting or leasing them to third parties. The REIT is responsible for maintaining and managing these properties. If you see the phrase “REIT” listed anywhere, the writer is typically referring to an equity REIT unless otherwise specified.

Mortgage REITs

Mortgage REITs operate by issuing funding for mortgages to income-producing properties. They then collect and pay out dividends originating from the interest these mortgages generate.

Public non-listed REITs

Public non-listed REITs are registered with the SEC but are not publicly traded.

Private REITs

Private REITs are not listed on public exchanges and are exempt from SEC registration. You’ll need special access to invest in this type of REIT.

Step 2: Assess the risks associated with investing in REITs

Though investing in REITs is generally considered to be a more stable and safer investment thanks to SEC registration, it’s important for potential investors to understand the specific risks associated with REITs.  

Higher expense ratios

Because the properties involved in REITs need to be actively managed, expense ratios for REITs tend to be higher than mutual funds or other types of equities. An expense ratio that’s too high, combined with an REIT that isn’t producing expense-justifying dividends, can be a recipe for lost money.

Legal liabilities

There are myriad laws controlling renters’ rights, property leases, and titles. Legal snafus involving unpaid dues, disputes over title holdings and landlord responsibilities can be lengthy, and the bills for these disputes are often placed on the shoulders of the REIT investors in the form of decreased dividends.

Liquidity risks

REITs are less liquid than stocks or bonds because they typically require high minimum investments. Investors looking to sell their REITs may have trouble finding buyers.

Step 3: Choose a brokerage

REITs are publicly traded entities, so you can invest in them in a very similar fashion to stocks and bonds. The first step to making an REIT buy is to find a broker if you don’t already have an open account.

Check out Benzinga’s list of the best brokerage accounts online for an introduction to the differences between the different brokers and brokerage firms. Here’s a quick look at our favorites. 

Broker Best For Commissions Account Minimum Choose your platform
Ally Investment
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1 Minute Review

If investors are on the hunt for a bargain broker, Ally Invest could be the one. With low commissions across the board, Ally Invest (formerly TradeKing) stops potential investors in their tracks with its especially low mutual fund commissions. Commissions on stocks and ETFs are notoriously inexpensive as well, and for more active traders or those with larger account balances, commissions can dip as low as $3.95 per trade.

Pros
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TD Ameritrade
  • Beginner investors
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$0 $6.95 for OTC Stocks $0
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1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
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Cons
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eTrade
  • Mobile traders
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1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

If you are interested in investing in a non-publicly traded REIT, you’ll need to contact a specific broker that has access to that particular REIT.

You can also invest in REITs through publicly traded ETFs as well, like the Vanguard Real Estate ETF or the Schwab U.S. REIT ETF.

Step 4: Place an order

After you’ve selected the REIT or REIT ETF you’re interested in purchasing, the process to place an order for a buy will likely be similar to your platform’s process for buying a stock or bond.

Log onto your account and go to your broker’s page or tab dedicated to buying stocks and funds. Search for the REIT name or the ticker of the REIT ETF, enter the type of order you’d like and the number of shares you’d like to purchase. Double-check that the information you’ve entered is correct and place your order.

Final thoughts

Though there are many legitimate and profitable private REITs, you should be wary of anyone attempting to sell shares of an REIT that is not registered with the SEC.

You can check on the registration status of an REIT as well as its annual and quarterly reports by searching for it using the SEC’s EDGAR filing system. It’s also important to remember that because the REIT pays out a majority of its taxable income to shareholders, you are responsible for reporting and paying taxes on received dividends.

Research your REIT and brokerage options and keep careful records of received payments can help you avoid fraud and accidental financial malfeasance.

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$0 $5,000 for individual retirement accounts (IRAs) Learn More