Investing in REITs for Beginners 

One of the ways to build wealth is by investing in real estate. Taking this investment route can provide substantial cash flow, a hedge against inflation, some tax breaks and portfolio diversification – all while owning an asset or assets that only increase in value over time.  

This route to wealth is not without its caveats. The problem with most traditional real estate investments (i.e., buying physical properties), is that it is risky, difficult, and expensive.  

This is where REIT investing comes in. REIT stands for Real Estate Investment Trusts, and they can offer some of the benefits of real estate investment, without the hassles that come with ownership. So, what is REIT investing? Are REITs a good investment? What are the REIT investing pros and cons?  

In this article, InvestmentNews endeavors to provide some answers.  

What is a REIT? 

A REIT is a company that owns a sizable portfolio of properties. There are different types of REITs that give investors the opportunity to have partial ownership of real estate in the form of shares.  

REITs can own and manage a variety of residential, commercial, and specialty real estate developments that investors would not otherwise have access to. US Congress created the REIT specifically to address this issue. Creating the REIT made it easier for individual investors to buy and sell from a diversified investment portfolio.  

REIT companies earn income by investing in different types of real estate properties such as:  

• commercial properties 
• office buildings 
• shopping malls 
• condos 

• apartments 

As REIT companies receive rental income from these properties, the profits are distributed as dividends to the shareholders. REITs can also make money on capital gains by selling off the assets when they appreciate.  

The rules on REITs 

For REITs to operate and retain their status as such, the IRS has set certain rules. REITs must:  

• have at least 100 shareholders after one year of existence 
• distribute at least 90% of taxable income to shareholders in the form of dividends each year 
• have at least 75% of their total assets invested in real estate or cash 
• earn at least 75% of their gross income from real estate; this includes rent on real property, interest on mortgages, financing the real property, or from sales of real estate properties 
• have no more than 50% of shares held by five or fewer individuals during the last half of the taxable year 

If a REIT company consistently follows these rules, it need not pay tax at the corporate level. This privilege then allows it to finance real estate more cheaply, and thus earn more profits to distribute to investors.  

As they continue operations, REITs can expand further and pay out even larger dividends over time. 

How to invest in REITs 

REIT investing can be a surprisingly easy and straightforward process. As with any other publicly traded stock or mutual fund, REITs are listed on major stock exchanges. In fact, investors may have unknowingly invested in REITs, as shares in REITs can be embedded in mutual funds or exchange-traded funds (ETFs) contained within their 401(k) plans, IRAs, Thrift Savings Plans or other pension plans.  

To invest in REITs, start with opening a brokerage account online. By setting up a new brokerage account or using an existing one, investors can buy and sell REIT shares just like any other stock.   

Should investors prefer a more hands off, passive approach to their REIT investing, they can buy an ETF or mutual fund that already contains vetted REITs. Investors who choose mutual funds with REITs can enjoy lower risk and immediate diversification. There are many brokerage firms that offer these types of investments, and simply investing in them unburdens investors of the tedious task of researching on viable REITs.  

For a review of investment basics, read our guide on investing for beginners. 

What are the different types of REITs?

In general, there are three main categories of REITs according to the nature of their investment:

• equity REITs
• mortgage REITs
• hybrid REITs

These are further subdivided into three categories according to how they can be purchased:

• private
• publicly traded
• public non-traded

Knowing the different types of REITs allows you to decide which of them are suitable for you, considering your time horizon, risk appetite, financial goals and financial circumstances.

1. Equity REITs 

These are companies that operate like landlords. They do all the management tasks associated with owning and maintaining a property. Equity REITs carry out these tasks: 

• owning the real estate 
• collecting rent from tenants 
• taking care of upkeep 
• reinvesting into the property as needed 

2. Mortgage REITs 

As the name suggests, this type of REIT (aka mREIT) does not own the property, but instead owns the mortgages or debt securities on the property.  

Whenever a home buyer takes out a mortgage on a property, an mREIT may purchase the mortgage from the original lender. The mREIT then collects the mortgage payments, getting additional revenue from interest income.  

Mortgage REITs are considered riskier than equity REITs, but their main draw is that they pay out higher dividends.  

4. Publicly traded REITs  

These are REITs traded on the stock exchange, like stocks and mutual funds, and can be bought via a brokerage account. According to the National Association of Real Estate Investment Trusts (NaREIT), there are over 200 REITs that are publicly traded on the market.  

5. Public non-traded REITs 

While registered with the SEC, they are not on any market or exchange. Public non-traded REITs are traded via a broker who participates in public non-traded offers.  

Since they are not publicly traded, these REITs have low liquidity, and remain so often for eight years or more, according to FINRA.  

These REITs are also difficult to accurately price. The SEC has cautioned investors on these REITs. Their estimated value is not available until at least 1 ½ years after their offering closes.  

6. Private REITs 

These are unlisted REITs, making them even more difficult to trade and determine their true value. What’s more, Private REITs have less stringent disclosure requirements and are not subject to SEC registration.  

Seemingly glaring drawbacks like these make them unattractive to most investors, and even FINRA has issued warnings about investing in private and non-traded public REITs.  

Private and public non-traded REITs both have much higher minimum investment requirements, which can be upwards of $25,000. The fees associated with these two REITs are also much more costly. Investors could lose money as they cannot know the valuation until months after the initial listing.  

The pros and cons of REIT investing 

As with any investment, REITs have their share of benefits and drawbacks. Get to know more about the pros and cons to know if they’re worth your investment:  

The benefits of investing in REITs 

Investing in REITs presents several advantages, from generating consistent income through dividends to potentially securing higher returns. Let's look at these benefits to understand why REIT investing is a compelling choice for many investors: 

1. You get steady dividends 

Since REITs are legally required to pay out 90% of their annual income as shareholder dividends, they consistently offer some of the highest dividend yields in the stock market.  

This makes REIT investing a favorite among those looking for a steady stream of income. Some of the most reliable REITs have a track record of paying large dividends that have also increased steadily for decades. 

2. You can get high returns 

The returns from REITs can sometimes outperform equity indexes, which makes them an even more attractive option for investors who want easy portfolio diversification. 

3. You can enjoy high liquidity 

REITs, especially the publicly traded type, are much easier to buy and sell. REITs like these can beat the traditional and tedious real estate investments that involve buying, managing and selling commercial properties. 

4. You get lower volatility than other investments 

Compared to traditional stocks, REITs tend to be relatively more stable, which is partly due to their larger dividends. REITs can act as a hedge against the heart-rending roller-coaster rides associated with other asset classes. But note, however, no investment exists that is 100% immune to volatility. 

The downside of investing in REITs 

On the flipside, there are some disadvantages to REIT investing. These can be anywhere from debts and low growth to high initial investment amounts. Let’s go over these in more detail:  

1. Can be highly illiquid 

Although publicly traded REITs are easier to buy and sell than actual properties, some REITs are not as beneficial. If you invest in non-traded REITs and/or private REITs, it can take several years before you can realize any potential gains.  

2. REITs can be heavily in debt 

Some REIT companies can have a lot of debt. Since they are required by the IRS to give 90% of their profits as dividends, this, combined with considerable debt, can make them riskier investments.  

3. REITS can have low capital appreciation and low growth 

REITs paying out most of their profits as dividends to shareholders is both a blessing and a curse. Although the dividends provide good, if not higher, returns, REITs are forced to raise more funds by issuing new shares – this can dilute the value of existing shares. In a market downturn such as during a recession or financial crisis, investors will be unwilling to buy up more shares in a REIT.  

The REIT may not be able to buy more real estate to expand their portfolio and therefore increase their rental or mortgage income. REITs can only grow if investors are willing to buy more stock, which can also impact their capital gains.  

4. Investors get the tax burden 

REITs don't have to pay taxes, but their investors do. Investors must pay income taxes on any dividends they receive, unless their REIT investments are held in a tax-advantaged account like an IRA. 

5. Some REITs can be beyond investors’ reach 

Private and non-traded public REITs can have very high minimum account requirements. The initial investment can be pegged at $25,000 or more and can only be accessed via accredited brokers. Although these types of REITs can potentially earn a lot for high-net-worth investors, last year was not a good year for non-traded REITs.  

Some of them may also require that investors have a net worth of $1 million or more and/or have an annual income of at least $200,000 ($300,000 combined income for married couples) for at least the past two years.  

The Best REITs in the US in 2024 

For investors who are seriously considering REIT investing, here’s a sample of the best REITs as of March 2024. Remember, you can invest in these publicly traded REITs via a brokerage account.  

Investors who prefer REIT mutual funds can choose from these:  

With the potential to provide high, regular returns, investors will find that REITs can be a great addition to their investment portfolios. Also, the instant diversification that REIT investments provide is a good hedge against potential losses. In a recent study, even machine learning algorithms have determined that a portfolio with an asset allocation of 15% in REITs can offer substantial returns and the other associated benefits.  

Investment expert Dave Ramsey gives his two cents on REIT investing. In this video, he cautions beginning investors to stay away from private REITs, unless they are willing to forget about the money and not have access to it for years: 

Ramsey wisely counsels investors, regardless of skill and experience, to do their due diligence before investing in a specific REIT. 

As with all investments, investors should also think about their time horizon, risk tolerance, and financial goals when considering REITs.    

For more news on REIT investing and other similar strategies, read and bookmark our section on investing. You’ll find the latest news and opinion pieces from experts in the industry.