REITs (Real Estate Investment Trusts)
What Are REITs and Why Should You Care?
Investing in real estate might be a goal for many, but not everyone has the capital to purchase property outright or has the time to manage it. This is where REITs, or Real Estate Investment Trusts, help. A REIT allows everyday Americans—not just Wall Street, banks, and hedge funds—to invest in income-producing real estate without having to buy, manage, or finance properties themselves. But what exactly are REITs and why should you care?
A REIT is a company that owns, operates, or finances income-generating real estate. These can include properties like shopping malls, office buildings, apartment complexes, hotels, and even infrastructure like cell towers and data centers. What makes REITs unique is that they are legally required to distribute at least 90% of their taxable income to shareholders as dividends*. This makes REITs especially attractive to income-focused investors, as they provide a reliable stream of high dividends compared to many other types of investments.
*Dividends are payments made by a company to its shareholders, usually in the form of cash or additional stock. These payments come from the company’s profits and are given as a reward for owning the company's shares.
Types of REITs
There are multiple types of REITs and each focuses on a different area of the real estate market:
Equity REITs invest in and own properties, making income mainly through rents.
Mortgage REITs (mREITs) make money by lending to property owners. They do this by either buying home or commercial property loans (mortgages) or creating new ones. They also invest in bundles of mortgages called mortgage-backed securities. Instead of owning buildings, they focus on earning interest from these loans.
Hybrid REITs do both. They own and manage properties like equity REITs, but they also invest in mortgages like mortgage REITs. This combination allows them to earn money from both rent and loan interest.
REITs can also specialize in specific types of properties. Some focus on healthcare facilities like hospitals and senior living centers, while others invest in shopping malls, apartments, or warehouses. This allows investors to choose REITs based on the industries they believe will perform well.
Why Invest in REITs?
REITs have multiple benefits that make them appealing for an investment portfolio. REITs can diversify (balance) your portfolio, as real estate often performs differently from stocks and bonds. Additionally, because they have high dividend payouts, REITs are a good source of regular income. REITs have a high liquidity (how easily something can be bought or sold). Unlike physical real estate, which can take months to sell, publicly traded REITs work like regular stocks—you can buy or sell them on the stock market at any time. This makes it easy for investors to invest in real estate without the hassle of owning and managing property. Lastly, since real estate prices and rents typically increase over time, REITs can grow in value and provide higher income, helping investors keep up with inflation.
REITs return in comparison with U.S. stocks return
Risks
While REITs have many advantages, they also have some risks. Publicly traded REITs can fluctuate in price, just like stocks. Also, when interest rates rise, borrowing money becomes more expensive. Since REITs often take out large loans to buy properties, higher interest rates mean they have to pay more in interest. This increases their costs and can reduce their profits, which may lead to lower returns for investors.
How do you invest in REITs?
Investing in REITs is fairly easy. You can buy shares of publicly traded REITs through an online brokerage account (a service that lets you buy and sell investments like stocks). Some popular platforms are Fidelity, Robinhood, and Charles Schwab. If you want to try to reduce your risk, you can invest in REIT mutual funds or ETFs (Exchange-Traded Funds). These are like bundles of investments that include many different types of REITs, so your money isn’t invested in just one REIT. However, some REITs aren’t traded on the stock market and are private, meaning you need to invest through a specific real estate company.
Conclusions
REITs offer a practical way to invest in real estate without the difficulties of directly owning property. If you're looking to diversify your portfolio, generate passive income, or protect against inflation, REITs can be a great way to achieve your financial goals!
