Investing in REITs 

What is an REIT?

A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy, manage or finance property.

What assets do REITs own?

In total, REITs of all types collectively own more than $3 trillion in gross assets across the U.S., with stock-exchange listed REITs owning approximately $2 trillion in assets, representing more than 500,000 properties. U.S. listed REITs have an equity market capitalization of more than $1 trillion.

REITs invest in a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels. Most REITs focus on a particular property type, but some hold multiples types of properties in their portfolios.
Listed REIT assets are categorized into one of 13 property sectors.

What do REITs do to make money?

Most REITs operate along a straightforward and easily understandable business model: By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. REITs must pay out at least 90 % of their taxable income to shareholders—and most pay out 100 %. In turn, shareholders pay the income taxes on those dividends.
mREITs (or mortgage REITs) don’t own real estate directly, instead they finance real estate and earn income from the interest on these investments.

Why invest in REITs?

REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of REIT-based real estate investment.

How can I invest in REITs?

An individual may buy shares in a REIT, which is listed on major stock exchanges, just like any other public stock. Investors may also purchase shares in a REIT mutual fund or exchange-traded fund (ETF).
A broker, investment advisor or financial planner can help analyze an investor’s financial objectives and recommend appropriate REIT investments.

How have REITs performed in the past?

How have REITs performed in the past?
REITs track record of reliable and growing dividends, combined with long-term capital appreciation through stock price increases, has provided investors with attractive total return performance for most periods over the past 45 years compared to the broader stock market as well as bonds and other assets.
Listed REITs are professionally managed, publicly traded companies that manage their businesses with the goal of maximizing shareholder value. That means positioning their properties to attract tenants and earn rental income and managing their property portfolios and buying and selling of assets to build value throughout long-term real estate cycles.
This drives total return performance for REIT investors, who benefit from a strong, reliable annual dividend payout and the potential for long-term capital appreciation. For example, REIT total return performance over the past 20 years has outstripped the performance of the S&P 500 Index and other major indices–as well as the rate of inflation.

Benefits of REIT investing

No corporate tax

To be classified as a REIT, a company needs to meet some strict requirements. For example, they have to invest at least three-fourths of their assets in real estate and pay at least 90% of their taxable income to shareholders. If it meets these requirements, a REIT gets a big tax advantage. No matter how profitable a REIT is, it pays zero corporate tax. With most dividend stocks, profits are effectively taxed twice — once on the corporate level, and again on the individual level when they’re paid as dividends.

High dividend yields

Since REITs are required to pay at least 90% of taxable income to shareholders, they tend to have above-average dividend yields. It’s not uncommon for a REIT to have a perfectly safe dividend yield of 5% or more, while the average stock on the S&P 500 yields less than 2%. This can make REITs an excellent choice for investors who need income or want to reinvest their dividends and let their gains compound over time.

Total return potential

REITs have the potential for capital appreciation as the value of their underlying assets grow. Real estate values tend to increase over time and REITs can use several strategies to create additional value. They might develop properties from the ground up or sell valuable properties and redeploy the capital. This, combined with high dividends, means REITs can be excellent total return investments. Several REITs have generated total returns that have handily beat the market for decades.

Access to commercial real estate

The main reason REITs were created was to allow everyday investors to put their money to work in assets that would otherwise be out of reach. Most people can’t go out and buy a class-A office tower all by themselves. But there are REITs that allow you to do just that. Thanks to REITs, I own a piece of hundreds of shopping malls, apartment complexes & data centers.

Portfolio diversification

Most experts would agree that diversifying your investment portfolio is a good thing. And although REITs are technically stocks, real estate is a different asset class than equities. Real estate tends to hold its value better than stocks during tough economies. And it’s a great way to add steady and predictable income. These are just two of many factors that help offset the inherent risk of an all-stock portfolio.

Liquidity

Buying and selling real estate properties can take a while. On the other hand, REITs are an extremely liquid investment. You can buy or sell a REIT whenever you want with a click of a button. If you eventually need the money from your REITs, it’s easy to free up your cash.

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