The Beginner’s Guide: How to Invest in REITs

REIT stands for real estate investment trusts. The 2006 Finance Act made this investment opportunity a tradeable commodity on the stock exchange. While before people had already created REITs on their own, now anyone can invest in one as easily as they could buy a stock. It’s an attractive way to get involved in real estate investing for a small amount of money and risk. 

According to Statista, in 1975, there were a mere 46 REITs. Today, there are around 219. Not only are there more options for investing in passive real estate, but there are also different types of portfolios available. The number might seem small, but keep in mind that each REIT may own thousands of properties. 

REITs are quite attractive because 90% of profits get paid out to shareholders, giving the investment company huge tax breaks. The share of profits also makes them desirable to investors. Here’s how to invest in REITs.

Benefits of Investing in REITs

If you’re looking to expand your portfolio and real estate sounds like a solid long-term investment strategy, there are some benefits to choosing REITs.

1. Less Risk Than Buying Outright

You could purchase your own property and become a landlord. There is a lot of risk involved, and you’ll tie up your capital and possibly your personal property as collateral. With a REIT, you invest as much as you want and let someone else assume the risk. While you’ll share the profits and not make a return as quickly, you’ll also be less likely to lose everything you have because of one bad investment. 

2. Diversification Creates Safety

While there are a few risky REITs, the majority present a pretty safe investment. Because most trusts buy property in different areas and types, you’ll find that even if one asset in the portfolio performs poorly, others may make up for the downturn. 

3. Payout of Dividends

Most REITs pay out dividends to shareholders. You’ll get your money sooner than you might with other long-term real estate investments. To avoid high taxes, the trust is much more likely to send you regular payments. This can be an excellent investment for a retiree who desires regular payments but doesn’t want to withdraw money directly from their retirement investments. 

Keep in mind that dividend and capital gains payments are treated as income, and you’ll be taxed on them. If you receive a large amount from your REIT, you may want to pay estimated taxes to avoid any penalties or owing when you file taxes. 

4. Opportunity for Capital Appreciation

You aren’t just investing in paper. The trust buys property, and most tend to increase in value each year. When you invest in a REIT, you may not make as much one quarter as another, but you’ll still gain money as the value of the investments’ equity grows. When the trust does sell a property, you’ll get your share of the profit. 

5. Accessibility to Commercial Real Estate

The average person could never afford to buy a piece of commercial property. However, warehouses, apartment buildings, and even manufacturing facilities can offer great return on investment (ROI). By pooling money, you can afford to invest in buildings you’d never be able to get near on your own. 

6. Easier to Sell

If you buy property and want to sell it, you might wait months for an offer. With a REIT, you can buy or sell whenever you’d like. The investment is fluid and doesn’t tie up your money the way hands-on real estate investing does.

Types of REITs

There are several different types of REITs to invest in. Knowing the difference may help you decide where best to put your cash or if you should spread your money out across different funds. There are three basic types, but there are differences in each fund you need to study before buying.

1. Mortgage

With mortgage REITs, or mREITs, the trust invests in mortgage-backed securities. They lend money to landlords, for example, and gain ground via the interest made on payments. Your mREIT might be impacted by changes in interest rates or if a loan is paid off early, reducing the amount of interest earned from the loan. Foreclosures and bankruptcies also create volatility in this type of REIT. 

2. Equity

An equity REIT is different in that they directly own and operate real estate that creates income. You might see buildings in the portfolio such as a shopping center, apartment building, student housing, hotel, or even land. You basically give the REIT the reins to manage property, and you provide some of the capital to get started. 

3. Hybrid

A hybrid REIT combines the methods of equity and mortgage REITs. The trust might own property that provides rent payments, but also buys mortgage-backed securities and receives regular interest payments. Such a portfolio is less volatile because it has so many different investments to absorb the shock of one default. 

Choosing the Right REIT for You

With so many benefits, investing in REITs can be a smart option. There is no right or wrong way to invest in REITs. You might choose a mixture of the three types, putting a little cash into each. Study the history of their success or failure, which will tell you a lot about the REIT’s management and whether you can trust it with your hard-earned money.