Investing in real estate can diversify your investment portfolio. But if you want to avoid the responsibilities of a property manager, such as researching, financing, buying and managing a property, consider a real estate investment trust (REIT).
Investing in real estate can provide a hedge against inflation and economic volatility. A REIT can allow you to earn a share of income generated from commercial or residential property, without operating the property. Here’s what you need to know on how to invest in REITs in the current market.
What Is a Real Estate Investment Trust (REIT)?
REITs allow you to pool your money with others to invest in large, income-generating properties you might otherwise be unable to afford. REITs are companies that own and/or operate commercial properties like office buildings, malls, apartment complexes and self-storage facilities.
REITs were introduced in 1960 to give everyone access to the benefits of real estate investing. REITs are modeled after mutual funds, and the U.S. Internal Revenue Service requires REITs to maintain real estate as their primary holdings and own real estate with a long-term investment horizon.
How Do I Invest in REITs?
If you’re looking to start investing in REITs, it’s similar to investing in stocks. Publicly traded REITs are listed on major stock exchanges, and you can buy REITs through an online platform or a broker. You can buy a public non-listed REIT through a broker. You can also buy REIT mutual funds and exchange-traded funds (ETFs).
Unlike a REIT ETF, a real estate ETF mostly invests in REITs and other real estate companies, such as homebuilders and real estate services companies.
How Much Money Can I Make With REITs?
REITs generate income in two ways: rental income and property appreciation.
When REITs rent their properties, the rental income is distributed to investors as dividends monthly, quarterly or annually. REITs are required to pay out 90% of their profits.
A REIT can also sell a property and realize a gain from appreciation. As an investor, you may also benefit from the sale proceeds.
If you own shares in a mortgage REIT (mREIT), this type of trust doesn’t own real estate. This company uses your money to fund mortgages or buy mortgage-backed securities. In this case, the dividends paid to you come from the interest payments to the mREIT.
Best Performing REITs Historically
There are several ways to slice and dice the performance of REITs. Looking at historical dividend growth is one method, especially since the dividend is why you might pursue REITs. That list of best-performing REITs could look different from a list derived from evaluating another metric, such as dividend yield, or evaluating several metrics.
Still, a few star performers consistently sit atop the list of best-performing REITs and appear poised to continue building on their historical prowess.
Prologis Inc.
Prologis Inc. is the largest industrial REIT, with a market capitalization of $102.93 billion. It dominates the e-commerce warehouse space, driven by Amazon and FedEx. Prologis Inc. has shown continued growth and has a strong balance sheet. The forward dividend yield for Prologis Inc. is 3.53%
American Tower Corporation
Long considered one of the best-performing REITs of all time, American Tower Corporation is a powerhouse in the telecommunications sector, well-positioned to reap the benefits of global demand for mobile data.
With a $90.93 billion market cap, American Tower Corporation operates the world’s largest portfolio of wireless broadcast and communications towers. American Tower Corporation has solid financials and a forward dividend yield of 3.25%.
Equinix Inc.
Equinix Inc. has had revenue growth for 80 consecutive quarters, the longest streak of any company in the S&P 500. The leader in the data center sector, Equinix Inc. has 200 data centers in 55 metropolitan areas on five continents.
The long-term demand for data storage and protection supports the growth potential of Equinix Inc. Its market position is solid because of its ability to serve the largest tech and telecommunications companies. Equinix Inc. has a market cap of $72.37 billion, and its forward dividend yield is 2.26%.
If you look strictly at dividend growth or some other metric, companies like W.P. Carey Inc. (diversified), Essex Property Trust (residential), Kimco Realty Corporation (retail) and Public Storage (self-storage) can also easily be named historical top performers. In the U.S. alone, there are more than 200 REITs to choose from.
Types of REITs
There are three types of REITs: equity, mortgage, and hybrid. The differences among them allow you to select a REIT based on your investment goals.
Equity REITs
Equity REITs are companies that build, develop, own, and manage investment properties that are commercial, residential, or both. These properties could include apartment complexes, shopping malls, storage buildings, and office space.
Equity REITs make money by leasing space to tenants. After paying the expenses to operate the property, equity REITs pay at least 90% of their income to shareholders. Equity REITS also sell properties; investors may see part of those sales proceeds.
Mortgage REITs
Mortgage REITs, or mREITs, don’t own physical properties. Instead, mortgage REITs originate mortgages or buy mortgages and mortgage-backed securities. They provide the liquidity that residential and commercial lenders need to purchase properties. In the process, mortgage REITs earn money on the interest on their investments.
Hybrid REITs
Hybrid REITs are what you might think: a combination of an equity REIT and mortgage REIT. A hybrid REIT might purchase properties like shopping malls and apartment complexes and fund new mortgages or buy existing ones. This type of REIT provides the best of both worlds if you can’t decide which type to invest in.
Ways to Invest in REITs
Here is how you can start diversifying your portfolio and investing in REITs:
- Publicly Traded REITs: You can open a brokerage account and purchase REIT stocks listed on major stock exchanges.
- REIT ETFs: You can open a brokerage account to buy REIT ETFs, or your employer’s retirement plan might offer REITs.
- Private REITs: Not registered with the SEC or sold on stock exchanges, private REITs are only available to institutional investors and accredited investors, people with a net worth of $1 million or those who earn $200,000 annually.
- Public Non-Traded REITs: These REITs are registered with the SEC but not listed on an exchange, and you can purchase them through your financial advisor or broker-dealer.
- REIT Mutual Funds: These can be purchased through a brokerage on major stock exchanges or an employer’s retirement account if offered.
Pros and Cons of REITs
REIT investing allows you to add real estate to your investment portfolio. Still, it’s important to consider the pros and cons first.
| Pros | Cons |
| Diversification: relatively low correlation with other assets, like stocks and bonds | Little Control: minimal control over the specific investment in properties |
| Income: the potential of steady income through dividends | Interest Rate Risk: high interest rates could dampen the real estate market, leading to a lower value in your investment |
| Competitive Total Returns: based on dividends and property appreciation | High Fees: high fees for public non-traded and private REITs |
| Liquidity: the ability to be sold easily on the stock exchange (for publicly traded REITs) | Market Volatility: avoidance of some short-term forces faced by stocks, but with potential volatility due to other factors that influence REITs |
| Transparency: monitoring by independent directors, analysts, auditors and the media | Tax Implications: taxable income at your ordinary tax rate |
| Tax Benefit: the opportunity for noncorporate taxpayers to deduct up to 20% of qualified dividends |
How to Choose Which REITs Are Best for Your Portfolio
It can be easy to get lost trying to negotiate which REIT is best for your portfolio. However, doing your research can guide you to REITs to help you maximize your returns while minimizing your losses. Many of the same analyses you apply to stocks can apply to REITs.
Investment Goals
When choosing the right REIT for your portfolio, consider your investment goals. For example, if you can’t have your money tied up for a long time, you might stick with publicly traded REITs that are more liquid than others. Also, you have to consider your risk tolerance and your diversification strategy.
Dividends
You might also select the REIT by looking at its dividend history, payout ratio, and dividend yield.
A REIT’s dividend history can help you assess whether you might receive a steady income from the REIT. Some investors also want to see a REIT that increases its dividend annually.
REITs have different payout ratios, based on a company’s net income and whether it is increasing or decreasing. While net income is the main measure with REITs, funds from operations (FFOs) — a measure of cash generated — is another indicator of the REIT’s performance. When choosing your REIT, you can evaluate the dividend payout ratio as a percentage of the FFO.
The dividend yield is the dividend divided by the share price. If the annual dividend is $10 and the share price is $100, that REIT has a dividend yield of 10%. High yields often appear high because of a drop in the share price. Also, consider that REITs with high dividend yields might be more volatile and less reliable.
Valuation Metrics
Reviewing REIT valuation metrics can give you an idea of its worth. You may want to analyze the net asset value (NAV), comparing the NAV to the REIT’s share price to see if it is overvalued or undervalued. You’ll consider the FFOs or adjusted funds from operations (AFFOs).
Other common approaches to valuing REITs involve estimating the potential return to an investor by looking at discounted cash flow, the dividend discount mode or capitalization rates (cap rates).
REITs: Real Estate Investing Accessible to Everyone
Now that you know how to invest in REITs, would you consider this as an option? REITs provide access to real estate investing without all the hassles of direct property ownership.
Overall, REIT can help you diversify your portfolio to hedge against inflation and stock market volatility and provide potential income. A financial advisor can assist you in evaluating which REIT or REITs might be best for your portfolio.
Frequently Asked Questions
Are REITs a good investment?
REITs can diversify your investment portfolio and generate dividend income and gains from appreciation.
What is the average return on a REIT?
A CEM Benchmarking 2023 study for Nareit found that listed equity REITs had an average annual net return of 10.9% between 1998 and 2021.
Do REITs pay monthly?
Some REITs pay dividends monthly, although REITs can also pay quarterly and annually. You can check an individual REIT’s dividend policy about distributions.