REITs give investors an economical and risk-free way to add real estate exposure to their portfolios without taking direct ownership risks themselves. REITs serve as an essential diversification tool in any investor’s arsenal.
REITs come in all shapes and sizes, offering exposure to virtually every kind of real estate investment opportunity. To remain eligible as REITs, at least 90% of their yearly earnings must be distributed as dividends each year.
What is a REIT?
REITs (real estate investment trusts) are investment vehicles that own, finance or manage real estate and are required by law to distribute most of their earnings back to investors as dividends or rent payments to tenants, interest payments on mortgage loans used to finance real estate purchases or sales proceeds from property sales. REITs are subject to regulation by the Securities and Exchange Commission (SEC) and must file financial disclosure reports via their EDGAR system.
REITs may either be publicly or non-traded. Publicly traded REITs offer more liquidity, or the ability to quickly convert your shares to cash; while non-traded REITs tend to be less transparent and could prove harder to sell quickly in case of emergency.
REITs tend to suffer in an environment of rising interest rates as investors switch their money to safer treasury bonds that provide inflation protection. REITs also tend to carry high debt loads and depend on market fluctuations for their stock prices; as a result, REITs should typically only be considered long-term investments.
How do REITs work?
REITs offer many advantages that make them appealing to investors. First and foremost, REITs give everyday investors access to commercial real estate without incurring the high upfront capital requirements or ongoing financial requirements associated with direct ownership of commercial real estate properties.
REITs distribute much of their taxable income as dividends to shareholders, which can be taxed at the same rate as corporate dividends or held tax-advantaged such as an IRA account.
Public REITs are regulated by the Securities and Exchange Commission (SEC) and traded on public exchanges similar to stocks. Buyers and sellers can buy or sell at will and offer daily liquidity.
Private REITs, on the other hand, aren’t subject to SEC regulation and don’t trade on an exchange, making them highly illiquid with an extensive minimum investment period required for purchase. Private REITs often specialize in specific sectors of the economy like health care by owning senior housing communities, research centers or medical office buildings – with little liquidity due to this difference between public and private REITs.
What are the benefits of investing in REITs?
Real estate investment trusts (REITs) provide an efficient way of accessing commercial or residential real estate without needing to buy individual properties directly. Their reliable income comes from rent payments or interest paid on mortgage loans secured against real property investments.
REITs offer another advantage by diversifying a portfolio with non-stock assets, which could help offer protection from an economic downturn or inflation as rents will likely increase with prices for goods and services.
REITs are relatively straightforward investments to purchase through brokers or exchange-traded funds/mutual funds and may even qualify as tax-advantaged accounts such as an IRA. Most REITs trade on public stock markets and generate substantial dividends, making REITs relatively liquid investments with potential long-term dividend returns.
If you’re curious about investing in REITs, hiring an advisor will help make sense of all their possible ramifications. SmartAsset’s free tool connects users with financial advisors in their area who can answer all their questions about this form of investment and craft an appropriate plan to suit their personal goals.
What are the disadvantages of investing in REITs?
REITs offer an easy way to gain exposure to real estate while potentially reaping high dividend yields – however, like all investments they do carry some risk.
One major drawback of direct real estate ownership is tying up capital for an extended period in a single asset, often necessitating substantial cash reserves. REITs on the other hand tend to own multiple properties at once and hence lessen overall risk.
REITs may also be more volatile than other stocks due to real estate market and stock market fluctuations and trends, or investing in debt assets which can be significantly affected by changes in interest rates.
If you’re thinking about adding REITs to your portfolio, speak with a financial advisor first. SmartAsset’s free tool connects users to advisors serving their area; just answer a few simple questions and we will match three qualified advisors that could assist.
