How to Invest in REITs
Real estate investment trusts (REITs), pronounced “REETS," are companies that own moneymaking real estate properties. REITs give individual investors a way to invest in real estate without needing to buy property or become a landlord. Most REITs trade on major stock exchanges and have historically performed well, which makes them a good choice to help diversify your portfolio.
REITs mostly represent commercial and residential real estate companies that are designed to generate cash flow from rents. REITs are generally diversified across a range of properties. For investors, in most cases, REITs have the benefit of liquidity, making this investment vehicle more like purchasing stocks than buying physical real estate.
Congress established REITs in 1960 to give middle-class Americans an affordable vehicle to invest in income-producing real estate.1 The Tax Reform Act of 1986 allowed REITs to not only own and finance real estate but to also manage and operate it. Today, REITs are in about 40 countries.
About 43% of American households own REITs.1 If you're interested in becoming one of them, learn more about how REITs work, how well they tend to perform, and how to invest in them.
How do REITs work?
REITs typically generate income by leasing space and collecting rent, paying their stockholders in dividends.
By federal law, REITs must pay at least 90% of their taxable income in shareholder dividends. REITs are typically traded on the major stock exchanges. This can be through stocks in individual real estate companies or through index funds, mutual funds, or ETFs that hold stocks from a variety of different real estate companies.
There are also private REITs that are generally sold only to institutional investors, entities that accumulate funds from a large number of investors and invest on behalf of those members. There are also public non-listed REITs that don't trade on the major stock exchanges. People who want to buy public non-listed REITs should go through their broker or financial advisor as there are many things to consider when buying non-listed REITs.
To be classified as a REIT, a company must adhere to a variety of rules and regulations Some of the common considerations for REITs, include:2
- Be structured as a corporation
- Be managed by trustees or a board of directors
- Invest at least three-fourths of their assets in real estate
- Derive at least three-fourths of their gross income from real estate assets and cash
- Pay at least 90% of their taxable income as dividends to shareholders each year
- Have at least 100 shareholders, after the first year of existence
- Not have five or fewer shareholders owning more than half of their stock.
How have REITs performed over the years?
REITs have historically performed well over the long term and have generally out performed the stock market over the past 45 years, according to Nareit, the worldwide voice of the REIT industry.3 Kiplinger reports that real estate has been one of the best-performing investments over the past 20 years, posting richer returns than the S&P 500 Index, growth stocks, value stocks, bonds, and gold.4
REITs, in addition to producing income from rents, also benefit from property appreciation. Over a 30-year period ending December 31, 2020, the total average REIT annual return (which includes both equity and mortgage REITs) has been about 9.6%. The total average annual return of just equity REITs during that same time has been about 10.1%.5
When broken into categories, from 1994 to 2020, the best performing REIT type has been self-storage, with an annualized total return of 15.1%. Residential is next at 11.2% followed by healthcare and industrial, both at 10.9%.5
Most REITs trade on major stock exchanges and have historically performed well, which makes them an excellent diversifier for your portfolio.
Including REITs in your IRA
REITs aren't taxed at the corporate level but are instead taxed like limited liability corporations (LLCs).2 This means their income isn't taxed until it's paid to the shareholders. Because of this specialized tax structure, REITs often pay 100% of its taxable income to shareholders.
Including REITs in your traditional IRA account means you won't pay taxes on income earned until you take money out of your IRA. This is different from holding your REITs in a non-retirement account, where you'd need to pay taxes on your dividends every year. If you include REITs in a Roth IRA, you won't get a tax deduction for the contribution as you would with a traditional IRA, but neither your dividends nor the proceeds of your sales from any REITs will be taxed upon withdrawal.6
Different Types of REITs
There are two main types of REITs: equity REITs and mortgage REITS (called mREITs). Equity REITs, which represent most REITs, produce income from rents and from the sale of properties. mREITs invest in mortgages and mortgage securities from commercial and residential properties and produce income from interest earned.
Some examples of equity REITs include the following:
- Shopping centers and malls
- Health care facilities
- Golf courses
- Manufactured (mobile) home communities
- Life science buildings
- Movie theaters
- Gas stations
- Single-family rental housing.
Some of the larger REITs include Annaly Capital Management, Prologis, Simon Property Group, and Public Storage.6
How to invest in REITs
To invest in REITs, you can buy shares in real estate companies that are listed on the major stock exchanges. Alternatively, you can buy shares in a REIT index fund, mutual fund, or exchange-traded fund (ETF), which allow you to invest in multiple companies at once. These can be either funds that focus on a specific type of property (like office buildings or residential real estate), or they can include a broader range of property types.
To minimize volatility in your REIT portfolio and achieve a more typical rate of return, a solid strategy is to diversify your portfolio by investing in more than one property type.7 You can do this on your own, by selecting a variety of individual REITs. Or you select a REIT mutual fund or ETF that owns shares in a broad range of properties.
For more information on how to invest in REITs, talk with your Synovus financial advisor. They can help guide you in choosing the investments that make the most sense for you.
Important disclosure information
Diversification does not ensure against loss.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- Nareit, "History of REITs & Real Estate Investing," accessed February 27, 2022. Back
- Securities and Exchange Commission, " Investor Bulletin: Real Estate Investment Trusts (REITs)," accessed March 24, 2020. Back
- Nareit, "What's a REIT? (Real Estate Investment Trust)?" accessed February 27, 2022. Back
- Lisa Springer, "7 REIT ETFs for Every Type of Investor," Kiplinger, published August 19, 2021, accessed February 27, 2022. Back
- Motley Fool, https://www.fool.com/research/reits-vs-stocks/, accessed April 20, 2022 Back
- SWFI, "Top 100 Largest Real Estate Investment Trust Rankings by Total Assets," accessed February 27, 2022. Back
- Steven Fiorillo, "Top 5 Ideas for Building a Diversified REIT Portfolio," TheStreet, published July 27, 2021, accessed March 24, 2022. Back
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