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.
How to Start Investing in REITs
If you’re looking to start investing in REITs, it’s similar to investing in stocks. Follow the steps below to get started.
Step 1: Understand What REITs Are
REITs are companies that own or finance income-producing real estate, like apartment buildings, shopping centers or data centers. They’re legally required to pay out at least 90% of taxable income to shareholders, making them a popular option for income-focused investors. With REITs, you can invest in real estate without owning physical property.
Step 2: Decide How You Want to Invest
You can invest in REITs in a few different ways. Publicly traded REITs are bought and sold like stocks through a brokerage account. REIT ETFs or mutual funds give you exposure to a basket of REITs, offering instant diversification. Non-traded or private REITs are another option, but they’re less liquid, carry more risk, and are typically accessed through financial advisors or specific platforms.
Step 3: Open a Brokerage Account
To buy public REITs or REIT ETFs, you’ll need a brokerage account. Platforms like Vanguard, Fidelity, Charles Schwab, E*TRADE, or Robinhood let you invest easily. Choose one based on ease of use, available research tools, and any trading fees involved.
Step 4: Research the REIT or Fund You Want to Invest in
Don’t buy blindly. Look at the REIT’s dividend yield, how consistent the income has been, and a key metric called Funds From Operations (FFO), which shows how profitable the REIT is. Also consider the type of real estate it invests in (residential, industrial, healthcare and more.), the geographic areas it covers, its debt levels, and management quality.
Step 5: Diversify Your Investments
Avoid putting all your money into one REIT. Instead, consider spreading your investments across different property sectors or using REIT ETFs for built-in diversification. This reduces risk and helps smooth returns over time.
Step 6: Know the Tax and Fee Implications
REIT dividends are taxed as ordinary income, which is often higher than qualified dividend tax rates. If you’re investing through ETFs or mutual funds, also be aware of the expense ratio, which is the annual fee for managing the fund, and it can eat into your returns if it’s too high.
Step 7: Monitor and Adjust Your Portfolio Over Time
REITs can be volatile depending on interest rates and the real estate market. Keep an eye on how your REIT investments are performing and rebalance your portfolio if necessary to stay aligned with your financial goals.
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.
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.
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 |
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
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REITs can diversify your investment portfolio and generate dividend income and gains from appreciation.
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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.
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Some REITs pay dividends monthly, although REITs can also pay quarterly and annually. You can check an individual REIT’s dividend policy about distributions.
