What is a REIT?
If you have heard of REITs but aren't sure what they are or how to invest in them, you've come to the right place. A REIT, or Real Estate Investment Trust, is a type of real estate company modeled after mutual funds. Created by Congress in 1960, this particular investment vehicle gives everyday folks the opportunity to invest in income-producing real estate. This provides greater investment opportunities for the general public. We can invest in real estate through our 401(k) plans by choosing to purchase shares from the trust company (some companies are publicly registered with the SEC and have their shares listed and traded on major stock exchanges).
I remember the first time that I heard about this form of investing, and almost immediately, I was intrigued. The thought of being able to invest in properties indirectly really excited me (it still does). I'll admit that it's probably not as thrilling as actually purchasing your own property, but limiting the direct risk while still being able to invest still holds a bit of excitement. The most important thing to do before getting into any type of venture is to thoroughly research the topic first. That way, you can start out of the gate strong. The momentum shifts in your favor because you did a little research first instead of just flailing around and trying to get a grip on what needs to happen.
With that said, I found the specific information contained in this five-star book especially helpful, Investing in REITs: Real Estate Investment Trusts - available in hardcover or Kindle edition. I highly recommend this book if you are looking to get more sophisticated with this type of investing and are looking for a good starting point to launch from.
How Do I Invest in REITs?
The method to invest in REITs is similar to how many invest in stocks and bonds through mutual funds. Basically, you are purchasing stock in order to earn a share of the income produced through real estate investments (such as apartments, offices, hotels, etc.) without having to purchase or finance a property. These trust companies own many of the apartment buildings, shopping malls, hotels, and office buildings that you see every day. Today, anyone in the world can invest their money directly through these trusts.
If you are looking to invest in REITs, you will find that the industry itself is quite diverse. They are often classified into two major categories: equity and mortgage. An equity REIT will derive most of its income from rent. Alternatively, mortgage REITs derive income from interest earned on investments in mortgages or mortgage-backed securities.
REIT investing is governed by the IRS, SEC, and other government agencies. If a REIT is publicly registered, it must operate under the same rules that apply to any other public company with regards to financial reporting. If the trust is traded publicly, it must adhere to the strict rules of the exchange on which it is traded (New York Stock Exchange, NASDAQ, etc.).
What's great about investing in REITs is that it doesn't matter what your income level is and diversification is included by its very nature - both by property as well as geography (location of the property). These trusts must also pay at least 90% of their taxable income as dividends to shareholders. In 2013, REIT investors received $31 billion in dividends.
Investing in REITs is very similar to any other investments which require the purchase or sale of stock. This makes it easy to invest in this way if you choose to go through a broker, go through an online broker (such as TD Ameritrade), or even make it part of your existing investment portfolio - such as a 401(k) program.
Expected Growth for This Type of Investing
Generally speaking and over long holding periods, equity REIT returns have tended to outpace the rate of inflation, helping investors hedge the purchase power of their portfolios (source: Wilshire Associates, 2012, "The Role of REITs and Listed Real Estate Equities in Target Date Fund Asset Allocations").
Over the last 30 years, publicly-traded REITs outperformed the leading stock market indexes, including the S&P 500, Dow Jones Industrials, and NASDAQ Composite (source: FactSet, REITWatch).
Does that mean that investing in REITs comes without risk? Of course not. Any investment includes an inherent and understood level of risk, but that's where research and doing your due diligence comes into play. Make sure you dive into a good book and do a little background reading first.
Real Estate Investing for Dummies
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(price as of Jul 25, 2016)