The prospect of putting your money to work in the real estate market can be enticing, but what if you don’t have enough cash on hand to make a down payment? Buying shares of a real estate investment trust (REIT) is one option to get started investing in real estate without having to put up a sizable initial cash outlay. They have a history of generous dividend payments, making them a popular choice among income investors, but they are not without their share of drawbacks. In this article, we will discuss REIT stock investment, how to invest, and the best REIT to invest in.
What Is REIT
The term “REIT” refers to a business that generates income through the ownership, management, or financing of real estate. Like a mutual fund, a real estate investment trust (REIT) allows regular people to invest in real estate and reap the benefits of its appreciation in value, as well as gain access to dividend-based income and total returns, and promote local economic development and revitalization.
Through the purchase of stock in a firm or in a mutual fund or exchange-traded fund (ETF), investors can gain access to real estate portfolios through real estate investment trusts (REITs). Also, investors in a real estate investment trust (REIT) get a cut of the profits made by the company, but they don’t have to handle the property purchases, management, or financing themselves. About 150 million American households have some sort of real estate investment trust (REIT) in their retirement accounts.
Understanding REIT
The REIT is exempt from paying corporate income tax on its profits since it distributes the vast majority of its taxable income to its shareholders. Due to their unique legal status, REITs are in a better position to acquire property than their non-REIT counterparts.
In essence, a REIT generates income from its real estate investments, which it then distributes to its shareholders. The REIT’s dividends are paid out quarterly and capital appreciation is possible if the share price rises.
Some real estate investment trusts have a broader portfolio than others, while others focus on a specific niche. You can invest in real estate through a REIT even if you don’t have the cash on hand to buy a property or join a real estate investment club. In addition, a Real estate investment trust (REIT) is open to the public trade on major stock markets.
What Constitutes a Real Estate Investment Trust (REIT)?
Most real estate investment trusts (REITs) operate under a simple business model: they lease out space, collect rent, and give the money to their stockholders. Mortgage REITs are not property owners but rather real estate financiers. These real estate investment trusts benefit from interest earned on their holdings.
A firm must meet specific requirements under the IRC in order to be classified as a real estate investment trust (REIT). Long-term ownership of income-producing real estate is a must, as is the distribution of profits to shareholders.
To be considered a REIT, a corporation must satisfy the following criteria.
- Place at least 75% of your wealth in tangible investments like land, cash, or government bonds.
- Earn the bulk of your money via the sale of real estate, rental income, or interest on mortgages.
- Dividends to shareholders should account for at least 90% of annual taxable income.
- Exist as a legal entity subject to corporate taxation
- Have a group of overseers like trustees or directors
- Have at least one hundred investors by the end of its first year.
- Have no more than five people owning more than half the company’s stock.
Types of REITs
Here are the different types of REITs.
- Equity REITs. Equity REITs account for the vast majority of REITs today. Income-producing properties are owned or managed by equity REITs. Investing in equity real estate companies is commonly referred to as REIT in the market and by Nareit.
- mREITs. Mortgage REITs (mREITs) invest in or originate mortgages and mortgage-backed securities to generate interest revenue for the purpose of financing income-producing real estate.
- Private REITs. Since private REITs don’t have to register with the SEC, their shares do not trade on major stock markets.
- Public Non-listed REITs. While PNLRs are SEC-recognized investment vehicles, they are not listed on any major stock exchanges.
How Does REIT Work?
As part of the 1960 amendment to the Cigar Excise Tax Extension, Congress created a real estate investment trust (REIT). Shares in commercial real estate portfolios are now available to investors through this provision, which was previously exclusively available to the very rich and through huge financial intermediaries.
Also, apartment buildings, data centers, healthcare facilities, hotels, infrastructure (such as fiber cables, cell towers, and energy pipelines), office buildings, retail centers, self-storage, timberland, and warehouses can all be found in the portfolio of a real estate investment trust (REIT).
REITs often focus on one area of the real estate market. The portfolios of diversified and specialty REITs, on the other hand, may include assets of varying types, such as office and retail REITs.
Many real estate investment trusts (REITs) are traded like stocks on major securities exchanges, giving investors access to them throughout the trading day.
In addition, these REITs are highly liquid because of the high volume at which they trade.
How to Invest in REITs
Opening a brokerage account is the first step to invest in REIT, and it can be done in a matter of minutes. After that happens, a REIT will be traded on stock exchanges like any other stock. Because a real estate investment trust (REIT) typically pays out substantial dividends, it may be prudent to hold them in a tax-deferred account such as an individual retirement arrangement (IRA) until distribution.
However, buying an exchange-traded fund (ETF) or mutual fund that researches and invests in a variety of real estate investment trusts (REIT) can be a good alternative to trading individual REIT equities. Instantaneous diversity and reduced vulnerability result. These funds are available through a variety of brokerages, and investing in them is a time-saver compared to studying individual real estate investment trusts. Here are the simple steps on how you can invest in REIT as a real estate investor.
#1. Private REITs
Private REITs have all the characteristics of a REIT except that they are not registered with the U.S. Securities and Exchange Commission (SEC) and therefore cannot be traded on an exchange. They are not required to provide investors with the same level of transparency as a publicly traded firm because they are not registered. Only major pension funds and accredited investors (those with a net worth over $1 million or an annual income over $200,000) have access to private REITs.
The National Association of Real Estate Investment Trusts reports that the minimum investment in a private REIT might range anywhere from $1,000 to $25,000.
#2. Non-traded REITs
Non-traded real estate investment trusts are similar to both private REITs and publicly listed businesses in that they are registered with the SEC, but neither trade on major exchanges. This type of REIT is required to make public quarterly and annual financial reports because of their registration. Public non-listed REITs are another name for non-traded REITs.
In addition, non-traded REITs are typically very illiquid, making it difficult to get your money out of them if you suddenly need it.
#3. Publicly Traded REIT Stocks
This type of REIT is publicly traded on major stock exchanges and is SEC-registered, providing the best opportunity for ordinary investors to earn a return on their money. Because public corporations are subject to disclosure and investor supervision, these REITs are generally considered preferable to private and non-traded REITs due to their lower management expenses and improved corporate governance.
#4. REIT Preferred Stock
When compared to common stock, preferred stock acts more like a bond than a stock. Preferred stock, like bonds, has a fixed par value and pays a dividend in cash on a regular basis. Preferred shares, like bonds, will rise or fall in price depending on the level of interest rates.
However, preferred stock does not participate in the continuous profits of the firm beyond the cash dividend it receives, thus its value is unlikely to rise above the price at which it was issued. For this reason, unless the preferred stock was purchased at a discount to par value, the investor’s annual return is likely to be the value of the dividend. That’s in stark contrast to the potential long-term growth of REIT common stock.
Best REITs to Invest In
Put out of reach by the soaring cost of housing? Real estate investments can be a great source of passive income, but not everyone can or wants to maintain a rental property. Also, read HOW TO INVEST IN REIT: Guide & Reasons to Invest.
Here we have REITs or real estate investment trusts.
According to research’s senior vice president of real estate operations, Adam Littlefield, “REITs are companies that own and operate income-generating real estate properties and offer shares of ownership to investors.” Single-family homes, townhomes, apartments, condos, and commercial spaces including stores, offices, and warehouses are all examples of the types of assets owned by real estate investment trusts.
If you want to engage in the real estate market but don’t have the capital to acquire many properties, a real estate investment trust (REIT) is a great alternative. Real estate investment trusts (REITs) are corporations that control a variety of properties, such as residential communities, office buildings, and retail centers. You can get the financial benefits of owning real estate by investing in a real estate investment trust (REIT).
Here is a rundown of some of the top real estate investment trusts (REITs).
#1. Boston Properties Inc. (BXP)
JPMorgan Chase & Co. (JPM) made headlines recently when it mandated that its executive team members work five days per week. Companies like Apple Inc. (AAPL) and Meta Platforms (META) on the west coast aren’t immune to the trend of restricting remote work policies across the country. Office real estate investment trusts (REITs) like Boston Properties, which owns, operates, and leases some of the largest workplaces in major metropolitan areas including Boston, Los Angeles, New York, San Francisco, and Seattle, are a good choice for investors hoping to profit on this possible trend.
Boston Properties stands to gain from increased occupancy, which in turn means stronger long-term lease income, should foot traffic improve. In addition, the payout yield on the REIT is 7.7%.
#2. Prologis Inc. (PLD)
The majority of Prologis Inc.’s purchases are warehouses and distribution hubs. The corporation, which has been around since 1983, has over 1.2 billion square feet of assets in its portfolio and counts Amazon, FedEx, and DHL as some of its top ten customers. It owns property in North America, South America, Europe, Asia, and Australia.
At the moment, Prologis Inc. is valued at $113 billion on the stock market. Its dividend is expected to grow at a CAGR of 14% over the next three years and 12% over the next five years. The company will pay a dividend of $0.87 per share on common stock and $1.0675 per share on preferred stock in the first quarter of 2023.
#3. Crown Castle Inc. (CCI)
Telecommunications real estate investment trusts (REITs) like Crown Castle offer a method to gain exposure to both real estate and infrastructure. This real estate investment trust (REIT) manages and leases out over 40,000 cell towers and 85,000 miles of fiber optic cable across the United States. Crown Castle has benefited from 5G’s popularity during the previous five years. Management anticipates this development. Crown Castle’s first-quarter 2023 dividend of $1.565 was a 6.5% increase from the first-quarter 2022 payout of $1.45. In addition, the current dividend yield for Crown Castle is 5.2%.
#4. Mid-America Apartment Communities (MAA)
A real estate investment trust (REIT), Mid-America Apartment Communities is included in the prestigious S&P 500. The majority of its holdings are apartment communities in the Sunbelt. Dividends have been issued by Mid-America Apartment Communities for quite some time. There has never been a dividend payment failure at this firm since 1994.
Also, there are currently approximately 100,000 apartments that belong to the corporation across 16 states and DC. For the first quarter of 2023, the corporation paid out a dividend of $1.40 per share. Mid-America Apartment Communities’ dividend increase averaged 5.9% during the past decade.
#5. Annaly Capital Management Inc. (NLY)
Mortgage REITs (mREITs) are a specialized form of real estate investment trust (REIT) that can generate more money for investors.
Huemmer explains that these REITs are unique since they do not hold physical properties but rather invest in financial instruments like mortgage-backed securities.
Annaly Capital Management is a good illustration of this trend because it invests mostly in agency mortgage-backed securities backed by commercial and residential mortgage loans and real estate. Annaly Capital Management (NLY) is a mortgage real estate investment trust (REIT) that now offers a high yield of 13.6%. However, investors should be aware that NLY has experienced below-average share price growth.
#6. W.P. Carey Inc. (WPC)
When compared to the risk of owning a single strip mall or office building, “the diversification of multiple different underlying properties in a REIT makes real estate investing very different.
Furthermore, W.P. Carey is a good choice for investors looking for a diversified REIT because it owns over 1,400 properties serving a wide range of industries, including warehouse, office, retail, self-storage, restaurant, hotel, fitness, and single-tenant industrial. As a diversified REIT, W.P. Carey allows investors to spread their bets across multiple property types. A 5.8% dividend yield is offered by the REIT.
#7. Federal Realty (FRT)
One of the earliest U.S. real estate investment trusts (REITs), Federal Realty was founded in 1962. Federal Realty’s portfolio includes a wide variety of retail and office buildings. CVS, Home Depot, Gap, and Albertsons are just a few of the top 10 tenants for Federal Realty.
However, despite its small portfolio, the company places a premium on streamlining its processes. This is why it has the best track record among U.S. real estate investment trusts for increasing its dividends year after year. Dividend increase at Federal Realty has averaged 7% annually over the previous 55 years.
Why Would Someone Invest in a REIT?
Investing in real estate investment trusts (REITs), especially publicly traded ones, can be beneficial.
- Disclosure of Stock Price. A non-traded real estate investment trust (REIT)’s value may be harder to determine than its share price. Until about 18 months after their offering closes, non-traded REITs normally do not disclose a per-share valuation. This could happen a long time after you’ve put money into the venture. It may take a while before you can gauge the value and volatility of a non-traded REIT investment.
- Regular payouts. The requirement that REITs distribute 90% of their annual profits as dividends to shareholders means that REIT stocks often offer some of the best dividend yields in the market. That’s why they’re so popular among investors seeking a passive income source. The best real estate investment trusts have a history of dividend payments that are both sizable and increasing over time.
- Less volatility. In part due to their higher payouts, real estate investment trusts (REITs) are less volatile than regular equities. Investing in a real estate investment trust (REIT) can help smooth out the roller coaster rides of other asset types. Nonetheless, no investment is totally safe from fluctuations.
- Diversification. Owning a REIT, which could consist of dozens or even hundreds of properties, allows you to spread out your investment risk more than if you only had a couple of properties in the same location.
What Is a Disadvantage of a REIT?
There are a number of upsides to investing in a REIT, but there are also some risks. Investment REITs have the following drawbacks:
- High accumulation of debt. Like typical homeowners, real estate investment trusts frequently carry significant amounts of debt. However, before buying the shares, buyers should verify that the REIT has the financial wherewithal to service its debt and maintain its dividend payment schedule.
- No secondary market and steep commissions. Be wary of sales commissions that are too high when investing in non-traded or a private REIT, and know that you may have trouble getting out of the investment if you do.
- Weak development. Long-term investors may not benefit as much from real estate investment trusts (REITs) as short-term ones. This is due to the generally low rate of appreciation of real estate assets. Therefore, investors seeking quick gains could be better served by purchasing common stocks rather than a REIT.
- Problems with authority. Publicly traded real estate investment trusts (REITs) are held to stricter standards than non-traded and private REITs, which may have major governance difficulties.
Conclusion
Real estate investment trusts (REITs) can let investors gain exposure to real estate assets without owning them. There are a lot of REITs that focus on one particular kind of property. Investors should learn about the firm’s investment philosophy and products before choosing a portfolio that matches their needs. Some real estate investment trusts (REITs) are quite dependable, but no REIT is risk-free. Do your research and don’t put more money into it than you can afford to lose.
REIT FAQs
Is REIT a Good Investment?
Although the mix of income and rental growth might be appealing to all investors, income seekers, in particular, will find REITs to be of interest due to their high yield compared to high-grade bonds and most equities.
What Assets Do Reits Own?
A real estate investment trust (REIT) is a firm that invests in and manages properties for the purpose of making a profit. “Real estate” could refer to an office building, retail center, residential complex, hotel, self-storage unit, or warehouse.
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