REITs let you invest in apartment buildings without buying the property

Invest in apartment buildings through REITS without purchasing the property.

For those looking to invest in real estate but don't have the money to purchase or time to manage properties, real estate investment trusts (REITS) may be for you.

What are REITs?

Real estate investment trusts (REITs) are companies that own and operate income-producing properties. REITs can be private, non-traded, publicly traded stocks or funds or preferred stock. REITs make money from rent they receive and when they sell real property for a profit.

We are going to concentrate on publicly traded REITs that are traded like stocks, which means that investors can buy and sell shares of REITs on stock exchanges.

There are two main types of REITS:

Equity REITs make money by leasing space and collecting rent on properties, and then distributing that income to shareholders as dividends, unless it's a mortgage REIT.
Mortgage REITs don't own real estate directly but instead provide loans to real estate owners and earns income from the interest on those loans.

Do REITs pay Dividends?

Yes, REITs pay dividends because they are required to return at least 90 percent of taxable income to shareholders every year. Investors can expect a steady cash flow and high dividend yields even in times of inflation and rising interest rates.

According to Duff & Phelps Investment Management Co., “historically, REITs have provided inflation protection with their unique ability to increase revenue through rent repricing, as well as via inflation-linked growth of their portfolio values, since replacement cost value increases exhibit strong correlation with inflation.”

In 2022, REITs paid out approximately $69.2 billion in dividends according to the National Association of Real Estate Investment Trusts (NAREIT).

Common types of Equity REITs

Equity REITs invest in a wide variety of real estate, including:

Residential

Properties can include apartment buildings, manufactured housing, condos, townhomes and even single-family homes.

Commercial

Properties can include shopping malls, office buildings, hotels, data centers, parking lots, self-storage and even industrial facilities.

Healthcare

Own and operate properties that focus on the healthcare industry including, hospitals, medical centers, and nursing facilities.

How to invest in REITs?

One way for individuals to invest in REITs is through a publicly traded REIT listed on a major stock exchange, just like any other public stock. That means shares of a REIT can be purchased through a broker. Here are the steps to take:

1. Open A Brokerage Account

Brokerage accounts you access to the stock market and other investments, including REITs. You'll need to transfer money from your checking account into the brokerage account before making a purchase.

Online brokerage accounts vary in cost and function but here are few options:

Magnifi is an online brokerage that uses AI to help investors sort through a wide range of options. Magnifi will suggest customized REITs according to your investing goals and search behavior. There is no cost to trade but Magnifi does charge a $13.99 monthly fee or an option to pay an annual fee of $131.99 per year.

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SoFi Invest is an automated brokerage that offers all-in-one investing including stocks, ETFs, IPOs and crypto. Plus, you’ll get $25 worth of your favorite stock when you fund a new account with a minimum $10. There is no cost to trade and SoFi will create a diversified portfolio based on your risk tolerance if you don't know where to start.

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M1 Finance offers 80+ tailored portfolios with a variety of investment strategies and is a good place to create an investment portfolio and invest in REITs. Choose from 6,000+ stocks and ETFs to create personalized portfolios The basic account is free, $95/year or $10/month for additional features.

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2. Do your research

Brokerage firms like Magnifi may use AI to suggest investing options but every REIT investment requires research of the company behind it. Important factors to consider when researching are:

How long has the company been in business?
What are the past returns generated by the REIT?
What are the current market conditions?
How much are the dividends and how often are they paid?

You might consider working with a financial planner or investment advisor when selecting REITs. You can also research through the REIT Directory on the National Association of Real Estate Investment Trusts website where you'll find nearly 200 different types of real estate investment trusts. Earnings, performance metrics, real estate portfolio holdings and news about each company can be found.

3. Choose an individual REIT or ETF REIT

REITs are sold individually where you can invest directly with a REIT or invest with many REITs through a REIT ETF. An ETF REIT includes several different REITs inside it.

Acorns is a brokerage that sells REIT ETFs. Acorns is best for hands-off investors who are okay with not making the day-to-day trading decisions.There’s no minimum to open an Acorn account, but the service requires a $5 balance to start investing.

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What makes REITs an attractive investment?

REITs are required to distribute 90% of their taxable income each year to shareholders in the form of dividends to maintain a tax-free status. This makes them an attractive investment for investors who are looking for a predictable stream of income, other benefits include:

Source of income. Dividends are payments made by a company to its shareholders. Most REITs pay dividends on a quarterly basis, but there are a some that pay monthly dividends,

Diversification. REITs can help investors to diversify their portfolios by providing exposure to real estate without having to buy and manage properties directly.

Liquidity. REITs are traded on stock exchanges, which means that investors can easily buy and sell shares. It takes much less time to buy and sell a REIT than it does a rental property.

Growth potential. REITs have the potential to generate capital appreciation over time.

Higher dividend yields: REITs typically have higher dividend yields than other types of stocks. This is because they are required to distribute 90% of their earnings to shareholders.

Risk reduction. Dividend-paying stocks are generally considered to be less risky than growth stocks.

What to watch-out for when investing in REITs

Interest rates. REITs are sensitive to interest rates. When interest rates rise, the value of REITs can decline. This is because REITs often borrow money to finance their investments, and higher interest rates make it more expensive for them to borrow.

Economic conditions. REITs can be affected by economic conditions, such as recessions. When the economy is doing poorly, demand for commercial and retail space can decline, which can hurt REITs.

Property risks. REITs are subject to the risks associated with owning and operating real estate, such as property damage and vacancy.

Management fees. REITs charge management fees to cover the costs of running the company. These fees can reduce the amount of income that is distributed to shareholders.

Final takeaway

If you are looking for a source of income from your investments, REITs can be a good option to consider. REITs have historically delivered competitive returns and can effectively diversify your portfolio to traditional investments like stocks and bonds.