Contributor, Benzinga
December 6, 2023

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.

REITs Defined

A REIT is a company that invests in real estate assets that generate income paid to investors in the form of dividends. REITs invest in a variety of real estate asset types, including commercial real estate, residential properties and 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.

REIT Structure

Not just any real estate company can take advantage of the tax benefits of being a REIT, though. The IRS has rules companies must follow to be taxed as real estate investment trusts. 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 five 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

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 across multiple property sectors.

Mortgage REITs

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. A handful of REITs 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 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

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. The shares are more difficult to liquidate than a public nonlisted REIT.

REIT Sectors

REITs are categorized based on the types of real estate assets they invest in. Most REITs specialize in a specific real estate sector and fall into one of the below categories.

Office REITs

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 focus on certain types of markets like major cities or secondary markets.

Retail REITs

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

Industrial REITs invest in real estate properties such as warehouses, distribution centers or factories. These properties may be single-tenant or multitenant. A growing number of industrial REITs specialize in specific real estate property types like cold storage or cannabis cultivation.

Residential REITs

The term residential REIT can be 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 mobile home parks.

Healthcare REITs

Healthcare REITs invest in many types of medical properties. Some specialize in long-term care facilities like skilled nursing and senior housing. Other health care REITs own medical office buildings, hospitals, surgical centers or life sciences research facilities.

Data Center REITs

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 unique because they are based on energy consumption instead of square footage.

Hotel REITs

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 third-party operators. The revenue for most hotel REITs is directly related to the daily occupancy of their properties because the operators manage the properties instead of leasing them.

Infrastructure REITs

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

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

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

Diversified REITs invest across multiple property types. Having a diversified portfolio limits these REITs’ exposure to any one 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 mREITs

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 mREITs

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 process for REIT investing is 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 portfolio risk.

Some REITs choose to pay out a lower dividend to keep their debt lower and have the cash to grow. Other REITs use higher leverage to maximize the amount they can pay out to investors in dividends.

Private REITs and public nonlisted 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. 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 have a negative outlook on the office real estate market, you’ll probably want to avoid investing in office REITs. 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 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.

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.

REIT ETFs

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.

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 Benzinga has found, and it has the lowest minimum investment of those reviewed. You can check out Benzinga’s reviews of private REITs below.

  • securely through Diversyfund's website
    securely through Diversyfund's website
    Best For:
    Low Cost Real Estate Investing
    Rating:
    Read Review
  • securely through Fundrise's website
    securely through Fundrise's website
    Best For:
    Beginner Real Estate Investors
    Rating:
    Read Review

    This is a testimonial in partnership with Fundrise. We earn a commission from partner links on Benzinga.com. All opinions are our own.

  • securely through Streitwise's website
    securely through Streitwise's website
    Best For:
    Small Account Real Estate Investing
    Rating:
    Read Review

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.

Continue reading: Best Mortgage REITS to Buy 

Real REITs: Weekly Newsletter

Benzinga’s research team has identified several undervalued REITs with major upside and strong dividends.

Get weekly updates on the REITs we’re watching and take advantage of this major opportunity in the market right now.

Frequently Asked Questions

Q

What is a paper clip REIT?

A

A paper clip REIT is a type of real estate investment trust that focuses on investing in office buildings or properties that are primarily occupied by paper clip manufacturing or distribution companies. This specialized REIT allows investors to gain exposure to the paper clip industry and potentially benefit from its growth and stability. By pooling investors’ funds, paper clip REITs can acquire and manage properties related to the paper clip industry, generating rental income and potentially providing attractive returns to shareholders.

Q

What qualifies as a REIT?

A

A REIT is a company that owns, operates or finances income-generating real estate. To qualify as a REIT, the firm must meet certain criteria set by the Internal Revenue Service (IRS). This includes distributing at least 90% of its taxable income to shareholders as dividends, investing at least 75% of its total assets in real estate and deriving at least 75% of its gross income from real estate-related sources. REITs provide people with the opportunity to invest in real estate without directly owning and managing properties themselves.

Q

How are REIT dividends taxed?

A

REIT dividends are taxed as ordinary income and the tax rate depends on your individual tax bracket. There may also be a 20% deduction for qualified business income. Consult a tax professional for accurate tax implications.

Q

Is a REIT a good investment?

A
Whether a REIT is a good investment or not depends on various factors such as the specific REIT, market conditions, and individual investment goals and risk tolerance. REITs can offer attractive returns through dividends and capital appreciation, particularly in the real estate sector, which can provide stability and income generation. However, like any investment, there are risks involved, such as fluctuations in property values, interest rates, and market conditions. It is important for investors to conduct thorough research, assess their own financial situation and goals, and consult with a financial advisor before making any investment decisions.

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