How to Invest in Real Estate Investment Trusts (REITS)
REITs are investment companies that own income-producing real estate. These can include:
- Self-storage facilities
- Medical facilities
The most reliable REITs pay large and growing dividends.
However, they must meet specific IRS standards. They should:
- Pay a minimum of 90% per year of their taxable income as shareholder dividends
- Invest at least 75% of their total assets in real estate or keep them as cash
- Receive a minimum of 75% of their gross income from real estate
- Have a minimum of 100 shareholders after their first year of operating
- Have no more than 50% of their shares held by five or fewer individuals during the final half of the taxable year
Key Types of REIT
REIT Trading Status
REITs can be traded publicly. Their shares are traded on an exchange the same as stocks and exchange traded funds (ETFs) and are available using traditional brokerage accounts.
The National Association of Real Estate Investment Trusts (NAREIT) states there are over 200 publicly-traded REITs on the stock exchange so you have plenty of options.
REITs can also be privately traded. These are unlisted, hard to value and hard to trade.
They are less attractive as they are exempt from SEC regulations, so there are fewer disclosure agreements. However, with higher risk comes greater reward.
REITs can also be non-traded. These REITs are registered with the US Securities and Exchange Commission (SEC) but are not available on an exchange.
Instead, they are purchased from a broker.
Publicly non-traded REITs are highly illiquid (not readily converted into cash for eight years or more) and are hard to value.
The SEC warns that REITs do not estimate their value to investors until 18 months after the offer closes; in some cases, this could take years.
Public non-traded and private traded REITs come with steeper fees and a higher account minimum – usually around $25,000.
They are only open to accredited investors with a net worth of at least $1 million, or a two-year annual income of $200,000 (single) or $300,000 (married).
Five Types of REITs
Money is generated from the rents charged to store owners.
Before investing, research the property and assess footfall, turnover and store owner reliability.
You do not want to invest in a mall with low footfall and empty shop units.
Retail may seem like a sure investment, but it is highly dependent on the economy. As more people embrace online shopping, the value of a mall falls.
If you are thinking of investing in residential REITs, look for areas with high job growth and population. You want to invest in an area with young professionals, usually a mobile population, who prefer to rent or have no other option.
You might also want to consider the development and gentrification of the surrounding areas and the impact it will have on your rent.
Areas that are soon to be developed or that are being gentrified will likely see a rent increase.
Healthcare REITs include:
- Medical centers
- Nursing facilities
- Retirement homes
When investing in healthcare, diversification is key. You want a variation of locations with a variety of customers.
You should also consider companies with healthcare experience and low-cost capital.
Invest in REITs located in steady economic areas such as Washington DC, rather than new hotspots without a proven track record.
As more employees look to improve their work-life balance, the concept of co-working spaces is increasing.
Consider buildings that offer this service, as well as traditional office spaces.
Do also consider the effect the rising remote working trend could have on your office investments.
Mortgage REITs depend heavily on interest prices. The higher the interest rate, the lower your dividend.
Finding a mortgage REIT that operates in a low-interest-rate environment is possible but very difficult.
Before committing to any mortgage REIT, do extensive research on the company and the deal involved.
Advantages of REITs
- There are guaranteed dividends – The law requires investment companies to pay out at least 90% of their income in dividends, meaning you will always receive a financial payout.
- Easy way to own real estate – They are packaged into shares and easily purchased or sold. Mutual funds and ETFs allow you to diversify by purchasing many individual REITs without doing the work to find them yourself.
- Passive with low minimums – You do not need a large sum of money to start investing. As the investment means you do not actually own the property, you are not tasked with any maintenance or landlord duties. You can continue with your typical working day and wait for the dividends to come through.
- Liquidity – As you do not own the physical building, it is easier for you to sell your investment as there is no hassle of assessments or viewings.
- Less volatile – REITs are less volatile than other stocks. This allows for a more diverse portfolio. Historically, REITs have outperformed other investment types in high-interest-rate environments and slow economies.
Disadvantages of REITs
- Limited growth – The 90% law means that companies do not have the funds to grow as much, or be as diverse, as they would like.
- Property values – Property is known for its changing habits. Some years see periods of steady growth and others, massive slumps. Carefully consider the location and type of investment. You want your investments to withstand recessions.
- Ordinary tax status – Aim to invest in tax-deferred accounts such as an IRA to keep tax at a minimum. REITs are taxed according to standard income rates rather than trading rates.
- Fees – Most REIT fees are taken upfront but can set you back around 30% of the REIT value. This could take a considerable chunk out of your investment fund, and it may be a while before you break even.
How Do You Start Investing in REITs?
- Fidelity MSCI Real Estate Index ETF
- Real Estate Select Sector SPDR Fund
- iShares Cohen & Steers REIT ETF
- Invesco Active US Real Estate ETF
- iShares US Real Estate ETF
- Power REIT – 107.87%
- Safehold Inc – 91.47%
- Equinix Inc – 43.85%
- Innovative Industrial Properties Inc – 42.36%
- Goodman Group – 30.81%
Key Points to Consider When Investing in REITs
Do Your Research
- What are the trends of the location?
- What type of REIT do you want to invest in?
- What are the consumer habits and demographics in that location?
- How is the economy looking?
- How did that location/REIT company/REIT type manage the last recession?
Start With Mutual-Funds or ETFS
Use the Right Companies
Look up reviews of companies you are interested in to see other people’s experiences with them.
Use the Correct Assessment Tools
Invest in Quality
Real estate is a proven long-term investment. Opting for a REIT instead of buying the physical property removes the stress and hassle involved with being a property owner.
It also makes being a property owner a reality for those who may not be able to otherwise afford it.
Before investing any money, take the time to do your research and assess all the risks involved. There are many articles to read about trading on the WikiJob website.
REITs are no better and no worse than any other investment type. All come with their good days and their bad.
Always remember, if any deal seems too good to be true, it probably is.
Top 17 Stock Trading Apps
Want to Trade Online?
Easy Trading Platform
Copy Experienced Traders
Trade from Your Pocket
Trade with Liteforex
CFD Trading on financial markets carries risks. Before deciding to trade, you need to ensure that you understand the risks involved.