How to Invest in Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) offer an accessible way to invest in real estate without having to own a physical property. These investment vehicles pool money from multiple investors to buy, manage, or finance income-producing real estate across commercial, residential and industrial sectors.

If you're interested in building a real estate portfolio, a financial advisor can help you analyze and manage investments.

How REITs Work

Established by Congress in 1960, REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy, manage, or finance whole properties. By pooling capital, REITs give the average investor access to portfolios of large-scale properties.

REITs generate rental income, which is then distributed to investors. To qualify as a REIT, a company must comply with several requirements, including the distribution of at least 90% of its taxable income to shareholders annually in the form of dividends. The majority of REITs trade on major stock exchanges, combining the liquidity of stocks with the benefits of real estate investment.

Types of REITs

Comparing different types of REITs can help you develop an investment strategy that fits into your financial goals and risk tolerance. Here are eight general types to keep in mind:

• Equity REITs : The most common type of REITs. They generate revenue primarily through leasing space and collecting rents. Equity REITs offer the potential for both income and capital appreciation.
• Mortgage REITs (mREITs) : Mortgage REITs do not own properties. Instead, they provide financing for mortgages and mortgage-backed securities and earn income from the interest.
• Hybrid REITs : These REITs own properties and invest in mortgages, offering a diversified income stream from rents and interest payments.
• Retail REITs : These REITs specialize in shopping malls and freestanding retail properties, and require careful analysis due to the fluctuating commercial real estate market.
• Residential REITs : These REITs focus on apartment buildings, manufactured housing and single-family homes. The demand for rental housing often drives the performance.
• Office REITs : Office REITs earn income from rents paid on office buildings. The success of office REITs is closely linked to employment rates and the demand for office space.
• Healthcare REITs : These REITs invest in properties like hospitals, nursing facilities and retirement homes. They benefit from the aging population and the growing demand for healthcare services.
• Industrial REITs : Specializing in warehouses and distribution centers, industrial REITs have benefited from the rise of e-commerce, which has increased demand for logistics and storage facilities.

How to Invest in a REIT

Investors who want to know how to invest in REITs will find the process similar to other aspects of their investment portfolio . It is a research-driven decision that requires ongoing analysis and adjustment based on how their long-term financial goals are being impacted by the market.

Step 1: Research REIT Options

As outlined above, different REITs utilize different strategies (ownership, financing, or hybrid) and are often focused on a particular category like residential or industrial properties. As every portfolio is unique, investors must determine which opportunities are best for them.

Step 2: Evaluate Performance and Risks

Due diligence is key. Evaluate a REIT's historical performance, dividend yields and growth potential. Pay attention to the management team's track record and the financial health of the REIT. Assess risks, such as market volatility and interest rate fluctuations, associated with the REIT.

Step 3: Choose a Brokerage Account

To invest in publicly traded REITs, you will need a brokerage account . Choose a brokerage that offers access to a wide range of REITs and provides robust research tools. Some brokerages may also offer commission-free trades for REITs, which can help reduce your investment costs.

Step 4: Make Your Investment

After setting up your brokerage account. determine how much to invest in your REIT . Place your order through the brokerage platform, specifying the number of shares you wish to buy.

Step 5: Monitor and Rebalance

Investing in REITs requires ongoing attention. Rebalance your portfolio as needed to maintain your desired asset allocation. This may involve buying more shares, selling underperforming REITs, or diversifying into other real estate sectors or investment types .

Bottom Line

Investing in REITs can offer you the opportunity to earn regular income through dividends from real estate investments without the need to buy, manage, or finance properties directly. REITs also offer portfolio diversification and potential for long-term capital appreciation, while being relatively liquid compared to owning physical real estate. But, their value and dividend payouts can be affected by interest rate fluctuations, and you will have to pay taxes on dividends.

Tips for Real Estate Investments

• A financial advisor can help you create a personalized real estate portfolio for your goals and needs. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• A big part of real estate investing is getting the proper financing, especially if you're looking to spread your cash across multiple investments. To estimate how much you might need to pay on financing, consider a free mortgage calculator .

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