Real estate has long been a favorite investment choice for many. Still, only some have the time or resources to buy and manage properties. That’s where Real Estate Investment Trusts (REITs) come in. They allow you to invest in real estate without the hassle of property ownership.
If you’re starting your investment journey, REITs are a fantastic way to diversify your portfolio, earn passive income, and enjoy the benefits of real estate investing.
In this beginner’s guide, we’ll explain REITs, how they work, and how you can easily start investing in them.
What are REITs?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Instead of buying properties, you can invest in a REIT, which uses your money and other investors to purchase commercial properties, office buildings, shopping centers, apartments, or even healthcare facilities.
The law requires that REITs return at least 90% of their taxable income to shareholders in the form of dividends. This makes them an attractive investment for regular income, mainly because REITs often pay higher-than-average dividends than stocks.
Types of REITs
There are several types of REITs, each focusing on different segments of the real estate market:
Equity REITs
These REITs own and operate income-generating properties like shopping malls or office buildings. Most REITs fall into this category.
Mortgage REITs (mREITs)
Instead of owning properties, mREITs provide financing for income-generating real estate by purchasing or originating mortgages and mortgage-backed securities.
Hybrid REITs
These REITs combine aspects of equity and mortgage REITs, holding physical properties and real estate debt.
Each type of REIT has pros and cons, and it’s important to understand which one best suits your investment goals.
Why invest in REITs?
Investing in REITs comes with several advantages, particularly for beginners:
REITs allow you to invest in large, income-generating properties that would be out of reach for individual investors. Adding them to your portfolio diversifies your investments across real estate sectors, reducing your overall risk.
The dividend payout from REITs provides a steady stream of income, ideal for long-term investors seeking consistent cash flow. Unlike owning physical property, REITs are traded on major stock exchanges, meaning you can buy and sell them quickly.
Finally, starting with REITs doesn’t require a lot of money, making them accessible to beginner investors.
How to start investing in REITs
Now that you understand the basics of REITs let’s go through the steps to begin investing
- Decide how you want to invest in REITs
There are different ways to invest in REITs, depending on your preferences and risk tolerance:
- Publicly traded REITs are bought and sold on major stock exchanges, making them the most accessible for individual investors. You can purchase shares of publicly traded REITs through a brokerage account.
- Non-traded REITs are not listed on stock exchanges, meaning they’re less liquid. They offer higher potential returns but come with more risk and fewer opportunities to sell quickly.
- REIT ETFs and mutual funds allow you to invest in multiple REITs simultaneously. These funds track the performance of a group of REITs, spreading your investment across different sectors and companies.
2. Choose the right REIT for your portfolio
When investing in REITs, choosing wisely based on your goals is essential. Here are a few factors to consider when selecting a REIT:
Sector
Some REITs focus on specific real estate sectors, such as residential, commercial, industrial, or healthcare. Choose one you believe will grow or provide consistent income.
Dividend yield
The dividend yield represents the income you’ll receive from your investment. Higher yields mean better returns, but they can also indicate higher risk.
Growth potential
Look for REITs with solid growth prospects. Check their property portfolios, recent earnings, and market position to determine whether they have the potential to increase in value.
Management team
A well-run REIT depends heavily on its management team. Research the leadership and their experience in managing real estate assets.
3. Open a brokerage account
You’ll need a brokerage account to buy publicly traded REITs or REIT ETFs. Opening one is simple and can be done online. Once you set up your account, you can search for REITs by their ticker symbol and purchase shares just like you would with stocks.
If you’re investing in non-traded REITs, you’ll need to go through a financial advisor or broker who specializes in these types of investments.
4. Evaluate the risks
Like any investment, REITs come with risks.
Real estate values fluctuate due to economic changes, interest rates, or other factors. It’s important to balance REITs’ higher dividend yields with the potential for price volatility.
Interest rate risk is another aspect to consider. When interest rates rise, the cost of borrowing for REITs increases, reducing profitability and dividend payouts. However, many REITs have historically performed well during moderate interest rate hikes.
5. Monitor your investment
Once you’ve invested in REITs, monitor their performance regularly. While REITs can provide steady income, market conditions can change, and it’s important to adjust your portfolio as needed.
Keep an eye on dividend yields, financial reports, and any developments in the real estate sectors your REITs focus on. If a REIT’s fundamentals weaken, you should reconsider your investment.
Conclusion
Investing in Real Estate Investment Trusts (REITs) is a smart way for beginners to get real estate exposure without needing to purchase and manage properties. With their ease of access, liquidity, and potential for steady income, REITs can be valuable to any portfolio.
Whether you’re looking to grow your wealth or generate passive income, REITs offer a range of options to suit your investment style.