How to Be a Real Estate Investor Review

What is a REIT?

REIT — rhymes with "sugariness"— stands for real estate investment trust, and its popularity is growing for investors who seek to expand their portfolio beyond publicly traded company stocks or mutual funds.

REITs are companies that own (and often operate) income-producing real manor, such as apartments, warehouses, self-storage facilities, malls and hotels. Their entreatment is uncomplicated: The almost reliable REITS have a rails record for paying large and growing dividends. Still, that potential for growth carries risks that vary depending on the blazon of REIT.

How do REITs work?

Congress created real estate investment trusts in 1960 every bit a way for private investors to own equity stakes in big-calibration real estate companies, simply as they could own stakes in other businesses. This motion made it like shooting fish in a barrel for investors to buy and merchandise a diversified real-estate portfolio.

REITs are required to run into sure standards gear up past the IRS, including that they:

• Render a minimum of 90% of taxable income in the grade of shareholder dividends each year. This is a big describe for investor interest in REITs.

• Invest at least 75% of total assets in real estate or greenbacks.

• Receive at least 75% of gross income from real estate, such equally existent property rents, interest on mortgages financing the existent property or from sales of real estate.

• Have a minimum of 100 shareholders after the first yr of existence.

• Have no more than 50% of shares held by five or fewer individuals during the terminal half of the taxable year.

By hewing to these rules, REITs don't have to pay tax at the corporate level, which allows them to finance real estate more cheaply than non-REIT companies can. This means that over fourth dimension, REITs can grow bigger and pay out even larger dividends.

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Types of REITs

REITs autumn into three wide categories divided by their investment holdings:  equity, mortgage and hybrid REITs. Each category can further exist divided into three types that speak to how the investment can exist purchased: publicly traded REITs, public non-traded REITs and private REITs.

Each REIT type has different characteristics and risks, and then information technology's of import to know what's nether the hood before you buy.

REIT types by investment holdings

Disinterestedness REITs:   Equity REITs operate similar a landlord. They own the underlying real estate, provide upkeep of and reinvest in the belongings and collect rent checks — all the management tasks you associate with owning a property.

Mortgage REITs: Unlike equity REITs, mortgage REITs (besides known equally mREITs) don't own the underlying belongings. Instead, they own debt securities backed by the property. For example, when a family unit takes out a mortgage on a firm, this type of REIT might buy that mortgage from the original lender and collect the monthly payments over fourth dimension. Meanwhile, someone else — the family, in this example — owns and operates the property.

Mortgage REITs are usually significantly more risky than their disinterestedness REIT cousins, and they tend to pay out college dividends.

Hybrid REITs: Hybrid REITs are a combination of both disinterestedness and mortgage REITs. These businesses ain and operate real manor properties also as own commercial property mortgages in their portfolio. Exist certain to read the REIT prospectus to sympathise its primary focus.

REIT types by trading status

Publicly traded REITs: Every bit the proper name suggests, publicly traded REITs are traded on an substitution like stocks and ETFs, and are available for purchase using an ordinary brokerage account. There are more than 200 publicly traded REITs on the market, according to the National Clan of Real Estate Investment Trusts, or Nareit.

Publicly traded REITs tend to accept better governance standards and be more transparent. They also offer the about liquid stock, meaning investors can buy and sell the REIT'due south stock readily — much faster, for example, than investing and selling a retail property yourself. For these reasons, many investors buy and sell only publicly traded REITs.

Public non-traded REITs: These REITs are registered with the SEC but are not available on an substitution. Instead, they can exist purchased from a broker that participates in public non-traded offerings, such as online real estate broker Fundrise . (Nareit maintains an online database where investors can search for REITs past list status ). Because they aren't publicly traded, these REITs are highly illiquid, often for periods of 8 years or more, according to the Financial Industry Regulatory Potency.

Non-traded REITs too tin can exist hard to value. In fact, the SEC warns that these REITs ofttimes don't guess their value for investors until 18 months after their offering closes, which can be years after yous've invested.

Several online trading platforms permit investors to buy shares in public non-traded REITs, including Modiv , the Diversy Fund and Realty Mogul.

Individual REITs: Non only are these REITs unlisted, making them hard to value and merchandise, but they also more often than not are exempt from SEC registration: As such, individual REITs have fewer disclosure requirements, potentially making their performance harder to evaluate. These limitations make these REITs less attractive to many investors, and they acquit additional risks. (Come across this helpful warning from FINRA on public non-traded REITs and individual REITs .)

Public not-traded REITs and individual REITs also tin can have much higher account minimums — $25,000 or more — to brainstorm trading, and steeper fees than publicly traded REITs. For that reason, private REITs and many not-traded REITs are open up only to accredited investors with a net worth (excluding the value of their primary residence) of $1 million or more, or annual income in each of the past 2 years of at least $200,000 if unmarried or $300,000 if married.

Best-performing REIT stocks: April 2022

Here are some of the meridian performing publicly listed REITs and then far this twelvemonth:

Symbol	Company	REIT performance (1-year total return)	Share price
BRG	Bluerock Residential Growth REIT, Inc.	177.four%	$26.52
APTS	Preferred Apartment Communities, Inc.	153%	$24.92
LAND	Gladstone Land Corp.	116.eight%	$40.36
NXRT	NexPoint Residential Trust Inc.	ninety.5%	$87.xvi
IRT	Independence Realty Trust	75%	$27.11

Rather than purchase individual REITs, you can too invest in REIT mutual funds and ETFs to get instant diversification at an affordable cost. Here are some top performing property-focused mutual funds and ETFs the past year:

Best-performing REIT common funds: April 2022

Symbol	Fund proper name	Year-to-engagement render %	Gross expense ratio
HTMNX	Heitman US Real Manor Secs Inv	-2.iii%	1.17%
TRREX	T. Rowe Price Existent Estate	-two.3%	0.78%
PAREX	T. Rowe Price Real Estate Advisor	-2.four%	ane.03%
JRIRX	JPMorgan Realty Income R5	-ii.4%	0.78%
MRESX	Cromwell CenterSquare Existent Manor Inv	-2.9%	one.12%

Best-performing U.Southward. REIT ETFs: April 2022

Symbol	ETF name	Twelvemonth-to-engagement render %	Expense ratio
KBWY	Invesco KBW Premium Yield Disinterestedness REIT ETF	-2%	0.35%
RWR	SPDR Dow Jones REIT ETF	-3%	0.25%
USRT	iShares Cadre U.Due south. REIT ETF	-three.2%	0.08%
NURE	Nuveen Short-Term REIT ETF	-3.4%	0.35%
BBRE	JPMorgan BetaBuilders MSCI U.S. REIT ETF	-three.4%	0.11%

All data electric current as of April 11, 2021. Sources: Nariet, Morningstar and ETF.com.

REITs' average render

Nareit notes that during the twenty-yr period ending December 2019, the FTSE NAREIT All Equity REITs index — which collects data on all publicly traded disinterestedness REITs —  outperformed the Russell one thousand, a stock marketplace index of large-cap stocks. The REIT indexed investments showed total returns of 11.half dozen% annually versus the Russell thousand's half-dozen.29%.

REITs: The pros and cons

Pros

There are advantages to investing in REITs, specially those that are publicly traded:

• Steady dividends: Because REITs are required to pay xc% of their annual income every bit shareholder dividends, they consistently offer some of the highest dividend yields in the stock market. That makes them a favorite amidst investors looking for a steady stream of income. The most reliable REITs take a rail tape of paying large and growing dividends for decades.

• Loftier returns: Equally noted above, returns from REITs can outperform equity indexes, which is some other reason they are an attractive option for portfolio diversification.

• Liquidity: Publicly traded REITs are far easier to buy and sell than the laborious process of actually buying, managing and selling commercial properties.

• Lower volatility: REITs tend to be less volatile than traditional stocks, in role because of their larger dividends. REITs tin act equally a hedge against the tummy-churning ups and downs of other asset classes, simply no investment is immune to volatility.

Cons

• Illiquid (especially non-traded and private REITs): Publicly traded REITs are easier to buy and sell than actual properties, but as noted above, non-traded REITs and private REITs tin can be a dissimilar story. These REITs must be held for years to realize potential gains.

• Heavy debt: Another consequence of their legal condition is that REITs accept a lot of debt. They're usually among the most indebted companies in the market. However, investors have become comfy with this situation because REITs typically have long-term contracts that generate regular cash flow — such every bit leases, which see to it that money will be coming in — to comfortably support their debt payments and ensure that dividends will all the same be paid out.

• Low growth and capital appreciation: Since REITs pay so much of their profits as dividends, to grow, they accept to heighten cash by issuing new stock shares and bonds. Merely investors are not e'er willing to buy them, such as during a financial crisis or recession. Then REITs may non be able to buy real manor exactly when they want to — but when investors are again willing to buy stock and bonds in the REIT, the REIT can abound again.

• Tax brunt: While REITs pay no taxes, their investors still must beat out for any dividends they receive, unless these are collected in a tax-advantaged account. (That's one reason REITs can be a keen fit for IRAs .)

• Non-traded REITs can be expensive:  The toll for initial investment in a non-traded REIT may be $25,000 or more and may be limited to accredited investors . Not-traded REITs also may have higher fees than publicly traded REITs.

Investing in REITs: Get started

Getting started is equally uncomplicated as opening a brokerage business relationship , which usually takes just a few minutes. And so you'll exist able to buy and sell REITs just as you would any other stock. Because REITs pay such large dividends, it can be smart to keep them inside a taxation-advantaged account like an IRA, so you defer on the distributions.

If you don't want to trade individual REIT stocks, it can make a lot of sense to simply purchase an ETF or mutual fund that vets and invests in a range of REITs for you. You get firsthand diversification and lower risk. Many brokerages offering these funds, and investing in them requires less legwork than researching private REITs for investment.

Former NerdWallet author Jim Purple contributed to this article.

Disclosure: The author held no positions in the aforementioned investments at the original time of publication.

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Source: https://www.nerdwallet.com/article/investing/reit-investing

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