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Real estate investment trusts (REITs) provide an excellent way for virtually anyone to invest in real estate. By investing in REITs, you can own shares of institutional-grade real estate portfolios in the most attractive markets. REITs are also a great way to diversify your stock portfolio with assets that provide consistent dividend income even when stock prices are down.
What is a REIT?
A REIT is a company that invests in real estate assets that generate income that is paid out to investors in the form of dividends. REITs invest in a variety of real estate asset types, including commercial real estate, residential properties and even mortgages.
Several large real estate investment companies choose to be classified as REITs because they don’t have to pay income taxes at the corporate level. The income is passed through to the shareholders, meaning it is only taxed once.
Not just any real estate company can take advantage of the tax benefits of being a REIT, though. There are certain rules the Internal Revenue Service (IRS) has set that companies must follow to be taxed as a real estate investment trust. These include:
- A REIT must pay out at least 90% of its taxable income to investors in the form of dividends.
- A REIT must have at least 100 shareholders, and no more than 50% of its shares can be held by 5 or fewer individuals.
- At least 75% of its total assets must be invested in real estate.
- At least 75% of its gross income must be generated through rent, mortgage interest or capital gains from selling properties.
- The entity must be a taxable corporation.
- The company must be managed by a board of directors or trustees.
Types of REITs
Investors can choose from several different types of REITs that vary based on the types of assets they invest in and how the shares are bought and sold.
Equity REITs are the most common type of real estate investment trust. This type of real estate company invests in physical properties that generate income through rent. Most equity REITs specialize in a specific property type, although some choose to spread their investments out across multiple property sectors.
Mortgage REITs (mREITs) earn most, or all, of their income by investing in debt secured by real estate. These companies either originate or purchase mortgage loans and earn a profit from the interest payments.
Some mREITs focus on either residential or commercial mortgages, while others have a diverse portfolio across different loan types. Many also earn additional income through mortgage servicing, where they get paid to service the loans for other mortgage lenders.
Public Nonlisted REITs
Most REITs are publicly traded on the major stock exchanges, like the New York Stock Exchange and the Nasdaq Stock Market. However, there are a handful of REITs that are registered with the Securities and Exchange Commission (SEC) but aren’t listed on a stock exchange.
Nonlisted REITs have the benefit of the share prices being less affected by the market, which offers some added stability for long-term investors. The downside to buying shares in a nonlisted REIT is that the shares aren’t as easy to liquidate because they can’t be sold on the market like publicly traded REITs.
Private REITs aren’t registered with the SEC and aren’t listed on any stock exchanges. These REITs use exemptions such as Regulation A and Regulation D similar to most types of real estate crowdfunding.
Private REITs have the benefit of lower overhead because they don’t have to meet the same reporting requirements as public companies. However, the shares are even more difficult to liquidate than a public nonlisted REIT.
REITs are categorized based on the types of real estate assets they invest in. Most REITs specialize in a specific sector and will fall into one of the below categories.
Office REITs own office properties and collect rent from tenants. Some office REITs focus on certain types of office buildings, like office towers or medical office buildings. Others may focus on certain types of markets like major cities or secondary markets.
Retail REITs come in many forms. Some focus on large regional shopping centers, while others may focus on grocery-anchored neighborhood shopping centers or single-tenant, triple-net lease properties.
Industrial REITs invest in properties such as warehouses, distribution centers or factories. These properties may be single-tenant or multitenant. A growing number of industrial REITs specializes in very specific property types like cold storage or cannabis cultivation.
The term residential REIT can be a bit misleading. Most of these REITs invest in multifamily properties, which are technically considered commercial real estate. Others own portfolios of single-family rentals, townhouses or even mobile home parks.
Healthcare REITs invest in many different types of medical properties. Some specialize in long-term care facilities like skilled nursing and senior housing. Others own medical office buildings, hospitals, surgical centers or life sciences research facilities.
Data center REITs are increasing in popularity because they have experienced significant growth over the past few years. These REITs own data centers that house servers for data storage and cloud computing. Many of the leases are very unique because they are based on energy consumption instead of square footage.
Hotel REITs are also referred to as lodging REITs or hospitality REITs. These companies own various types of hotels and resorts that are typically managed by 3rd-party operators. The revenue for most hotel REITs is directly related to the daily occupancy in their properties because the operators manage the properties instead of leasing them.
Infrastructure REITs own a unique class of real estate that most people don’t consider when they think about real estate investments. These REITs own infrastructure like data communication networks, such as cell phone towers, fiber optic routes and energy pipelines.
Self-storage REITs own storage facilities rented to individuals and businesses. Storage facilities are known for having high margins and being in high demand.
Specialized REITs invest in properties that don’t fall into these other categories. Some specialized REITs include companies that invest in properties like private prisons, casinos and billboards as well as other nonclassified property types.
Diversified REITs invest across multiple property types. Having a diversified portfolio limits these REITs’ exposure to any 1 property type throughout market cycles. This type of REIT offers some added stability, but they typically lack the same level of acquisition opportunities as companies that are major players in a specific sector.
Commercial mortgage REITs primarily invest in mortgages backed by commercial property. These loans may be commercial mortgage-backed securities (CMBS), Small Business Administration (SBA) loans, mezzanine loans or bridge loans.
Residential mortgage REITs invest in mortgages secured by single-family or small multifamily properties. Most residential mREITs have shifted their portfolios over the past year to have a higher percentage of agency mortgage-backed securities (MBS) that are guaranteed by the federal government.
How to Invest in REITs
The actual process for investing in REITs is typically pretty straightforward. It mainly comes down to choosing the right REIT investment for your particular long-term and short-term investment goals.
Choosing REITs to Invest in
Different types of REITs cater to different investment objectives. For instance, mortgage REITs pay some of the highest dividends available but typically come with the greatest risk.
Some REITs choose to pay out a lower dividend rate in order to keep their debt lower and have cash to grow. Other REITs use higher leverage to maximize the amount they can pay out to investors in dividends.
Private REITs and public non-listed REITs provide a great hedge against the stock market because their share prices are more closely tied to the value of their real estate portfolios. However, they don’t offer the liquidity that publicly traded REITs have, so shareholders are locked into a long-term investment.
You also want to consider the types of properties a REIT you’re looking at invests in. If you personally have a negative outlook on the office real estate market, you’ll probably want to avoid investing in office REITs. On the other hand, if you think the hotel industry is going to make a strong comeback, lodging REITs may be a good option for you.
Investing in Publicly Traded REITs
Buying shares of a publicly traded REIT is the easiest way to invest in REITs. You can also begin investing with virtually any budget because many REITs are priced at less than $50 per share. With many brokerages now offering fractional shares, you can even invest in any REIT for as little as $5.
Using Webull to build your REIT portfolio is recommended because it offers 0% commission trades, has a simple platform with extensive insight, and the fractional shares option makes it simple to build a diverse REIT portfolio with virtually any budget.
Simply look up the REIT you’re interested in, hit the Buy button, choose how much you want to invest in that REIT stock and submit.
You can also check out Benzinga’s top REIT picks for the month to help you get started.
Investing in Private REITs
You can’t invest in private REITs through a stock brokerage app. Instead, you’ll go directly through the REIT or a crowdfunding platform.
Private REITs require a higher minimum investment than publicly traded real estate stocks, so you’ll have to invest at least $500 to $1,000 in a single REIT.
DiversyFund Inc. is the best private REIT we’ve found, and it also has the lowest minimum investment of any we’ve reviewed. You can check out our reviews of private REITs below.
Perhaps the simplest way to build a diverse portfolio of REITs is to invest in a REIT exchange-traded fund (ETF). These ETFs follow a REIT index and invest across multiple companies. By investing in a real estate ETF you’re essentially paying a small fee to allow expert fund managers to choose which REITs to buy and when to sell.
Investing in Public Nonlisted REITs
Because nonlisted REITs aren’t traded on the stock market, you’ll typically have to go through a registered broker or investment adviser to invest in this type of company. Most nontraded REITs require a minimum investment of between $1,000 and $5,000.
The Bottom Line on REITs
REITs are an investment option that any investor should consider. They offer an easy and inexpensive way to invest in real estate. They also make an excellent addition to any stock portfolio because share prices are typically less volatile than other publicly traded companies, and they provide regular income through dividends. Even when the market is down, REITs still pay dividends based on their revenue.
Benzinga’s research team has identified several undervalued REITs with major upside and an average dividend yield of over 6%. Be the first to get access to our new REIT data with exclusive insights and trade alerts.
Continue reading: BEST MORTGAGE REITS TO BUY IN JULY
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