As an asset class, real estate can offer stable cash flow, protection against inflation and relatively low risk. But not all investors have the net worth, desire or experience needed to acquire an office or apartment building. That is where investing in REITs — an acronym for real estate investment trust that rhymes with ‘beets’ — comes in to play.
REITs are able to generate stable returns for investors because they are required to pay out 90 percent of their taxable income as dividends to their shareholders. Investors also realize returns when share prices rise due to increasing property values.
When you invest in a REIT, you are purchasing a share of a company that owns a portfolio of income producing real estate property. Oftentimes a REIT will specialize in a particular property sector, be it office, retail, apartment, industrial, hospitality, data centers — or even correctional facilities or cellphone towers. Some diversified REITs own properties in a few sectors. REITs that own property are known as equity REITS. There are also mortgage REITs that invest in debt secured by properties. Hybrid REITs invest in both properties and debt.
There are three types of REIT structures. Publicly listed REITs are registered with the SEC and trade on major stock exchanges. Public non-listed REITs are registered with the SEC, do not trade on an exchange, but still disclose quarterly and annual financial reports. Private REITs are not registered with the SEC, do not trade on an exchange, and are not required to disclose financials. There are REIT mutual funds and REIT ETFs available as well.
While you can log in to your brokerage account and buy a single stock in a REIT and sell it the same day, public non-listed REITS and private REITs have minimum investment amounts (anywhere between $1,000 and $25,000) and are generally much less liquid with minimum holding periods. Fees are going to be higher for public non-listed REITs and private REITs, but your investment is going to be more shielded from market volatility that can impact the share price of publicly traded REITs.
High dividend yields have made REITs a favored asset class for retirement funds. According to the National Association of Real Estate Investment Trusts (NAREIT), nearly 50 percent of all publicly traded REIT shares are held in pension plans and retirement accounts.
As with any investment, you need to perform proper due diligence before putting any money into a REIT. Read up on the various property sectors, comb through SEC filings and consult with a financial advisor before making any decisions. NAREIT is also a great source for information on REITs.