By Anthony Migliore, Senior Advisor
Real estate investment trusts (REITs) offer investors an opportunity to invest in real estate without having to purchase physical property. REITs are a type of security that invests in income-generating real estate properties, such as apartments, hotels, offices, and shopping centers. In this blog post, we will explore what REITs are, how they work, and how to invest in them.
What are REITs?
REITs were created by the U.S. Congress in 1960 to give individual investors access to the benefits of owning income-producing real estate. REITs are publicly traded companies that own, operate, or finance income-producing real estate properties. These companies are required by law to distribute at least 90% of their taxable income to shareholders as dividends, which makes them a popular choice for income-seeking investors.
How do REITs work?
REITs work like mutual funds, but instead of owning stocks and bonds, they own real estate properties. REITs are managed by professional teams who are responsible for acquiring, managing, and disposing of real estate assets. The income generated from these assets is then distributed to shareholders in the form of dividends.
There are two types of REITs: equity REITs and mortgage REITs. Equity REITs invest in and own income-generating properties, while mortgage REITs invest in mortgages and other real estate debt. Equity REITs are the more common type of REIT and offer investors exposure to a variety of real estate properties, while mortgage REITs offer higher yields but also come with higher risks.
How to invest in REITs
Investing in REITs can be done through a variety of ways, including:
1. Buying individual REIT stocks: Investors can purchase shares of publicly traded REITs on the stock market, either through a broker or an online trading platform.
2. REIT mutual funds or ETFs: Mutual funds and exchange-traded funds (ETFs) offer investors the opportunity to invest in a diversified portfolio of REITs, providing exposure to different types of properties and locations.
3. Non-traded REITs: These are REITs that are not listed on a public exchange and are only available through a broker-dealer. Non-traded REITs typically have higher fees and are less liquid than publicly traded REITs.
When considering investing in REITs, investors should also consider the following factors:
- The type of REIT: As mentioned, there are two types of REITs: equity and mortgage. Investors should consider which type of REIT aligns with their investment goals and risk tolerance.
- Property type: Different types of real estate properties have different risk profiles and return potential. Investors should consider which type of property they would like to invest in and research the market trends and conditions for that particular property type.
- Management team: The management team of a REIT is responsible for the success of the company. Investors should research the track record and experience of the management team before investing.
- Dividend yield: REITs are known for their high dividend yields. However, investors should not focus solely on the dividend yield when considering investing in REITs. They should also consider the stability and growth potential of the dividends.
In short…
Investing in REITs can be a smart way to add real estate exposure to an investment portfolio. By understanding what REITs are, how they work, and the different ways to invest in them, investors can make informed decisions to achieve their investment goals. When investing in REITs, investors should also consider the type of REIT, property type, management team, and dividend yield to make a well-rounded investment decision.