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How To Invest In REITs

October 18, 2022

Some REITs are traded on major stock exchanges, giving individual investors the opportunity to invest in real estate without needing to buy or manage the property.

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Buying shares of a real estate investment trust (REIT) is one option for investors who want to add real estate to their portfolios but don’t have the capital, expertise, or desire to buy property. These are specialized companies that pool money from investors to buy or finance real estate that produces income. REITs are required by law to issue at least 90% of their taxable income to their shareholders through dividends, making them exempt from most federal income taxes. 

Most publicly traded REIT shares are sold on major stock exchanges, so investors can sell and buy REITs as they would shares of a company. Investing in REITs is a way to get exposure to real estate passively, because the actual buying and managing of the properties is handled by the REIT’s executives.

3 ways to invest in REITs

There are several types of REITs. Although many are publicly traded companies, some are not available to individual investors. Each category can include companies with a focus in different sectors, such as retail, apartments, data centers, healthcare facilities, and more. One can invest in REITs on public markets or buy non-traded ones, and institutional investors may also purchase shares of private REITs.

1. Publicly traded REITs

Equity REITs, usually referred to simply as REITs, are publicly traded companies that own or manage properties like office buildings and shopping malls, and they make money from leasing the spaces to tenants or selling the properties. After expenses, equity REITs must pay at least 90% of their income to investors via dividends, and many pay 100%, according to Nareit.

Mortgage REITs, often referred to as mREITs, are another type of publicly traded company. They’re different from plain equity REITs in that they provide the financing for income-generating real estate. They seek to profit by earning more on the mortgages and mortgage-backed securities they hold than their cost of borrowing to fund those investments. 

To invest in these two types of REITs, investors can buy their shares just as they would of any other publicly traded company on the major stock exchanges. They can also opt to buy shares in REIT mutual funds or in REIT exchange-traded funds (ETFs).

2. Public non-listed REITs (PNLRs)

Public non-listed REITs (PNLRs) are less common than publicly traded REITs, but they operate the same way—making money by owning, managing, or financing properties—except that they do not trade on stock exchanges. Rather, investors can buy into PNLRs directly from the REIT company or from broker-dealers.

Like equity and mortgage REITs, PNLRs are registered with the Securities and Exchange Commission (SEC) and follow the same Internal Revenue Service requirements. But because they are not listed on exchanges, they are not subject to the public reporting and disclosure regulations of listed companies. Instead, PNLRs are required to publish regular, public financial disclosures to the SEC on a quarterly and yearly basis. Additionally, they are subject to state regulator assessments known as “blue sky” reviews, or rules that are designed to prevent securities fraud. 

Compared to listed REITs, PNLRs tend to be less liquid: Opportunities to cash out vary by company and are usually more limited. They are often longer-term investments because investors also frequently are bound by a minimum holding period. PNLRs may also require higher investment minimums than equity REITs.

3. Private REITs

These REITs are exempt from registering with the SEC and do not trade on stock exchanges. What’s more, there is no public or independent source of performance data available for tracking this category of REIT.

That’s because private REITs fall under a securities law known as “Regulation D.” This lets issuers sell securities only to well-funded or highly knowledgeable investors, including accredited investors or institutional investors like banks, mutual funds, and pension funds. Individual retail investors are generally unable to buy private REITs.

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What to consider before investing in REITs

As with any investment, REITs have advantages, drawbacks, and risks. Here are a few questions investors might ask themselves before buying into a REIT.

How much control do I want?

REITs offer the benefit of getting exposure to real estate without the need for a down payment or expertise in the field. But that benefit goes hand-in-hand with an aspect some investors may see as a drawback: lack of control over the underlying asset itself. The investor is buying a share of a REIT company, and it’s the managers who will decide which properties to buy and sell, as well as how they are operated and maintained. 

If investors want more control and have the capital, they may consider buying a property directly.

Am I looking for a long-or short-term investment? 

Publicly traded REITs may be attractive for those who want the option of a short-term commitment, because investors can choose when to trade the shares as they would with any stock. 

For some investors, the illiquidity of owning actual property may be a drawback. Real estate cannot be sold immediately like a stock or savings account. If an investor needs the money tied up in a property, they will have to put the real estate on the market and find a buyer—and deals can potentially take months.

For an investor seeking a longer-term investment, purchasing a property may be more attractive as values tend to increase over the long term. 

What will I pay in fees?

As with many investments that are ultimately managed by others, REITs charge fees. Investors can expect to pay management fees of about 0.5% of the trust’s assets. The company may also levy other fees for functions like setting up the trust.

Am I comfortable with fluctuations in the real estate market? 

Real estate can diversify a portfolio. However, though property values tend to rise over a long time horizon, they can rise and fall—just like the value of any other asset. Commercial real estate values plunged at the onset of the pandemic after stay-at-home orders barred people from going to the office, for example. In residential markets, some regions may be hot one year and cool the next. Overall, property values are linked to the broader economy, so they may stagnate or even fall in a downturn and rise during boom times.

The bottom line

A real estate investment trust (REIT) is a company that owns or finances income-generating properties like apartment complexes and shopping centers. They are required to issue at least 90% of their taxable income to their shareholders through dividends. 

Some REITs are traded on major stock exchanges like shares of any other company, giving individual investors the opportunity to invest in real estate without needing to buy or manage property. In addition to publicly listed REITs, investors may also buy public non-traded REITs from broker-dealers or from the companies directly. Institutional investors may also purchase shares of private REITs.  

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