Real Estate Investment Trusts (REITs) have become a go-to investment for people looking to enter the real estate market without buying or managing properties. Their popularity stems from unique benefits that appeal to both new and experienced investors. This article explains what REITs are, why they are so popular, and how you can start investing in them.
What Is a Real Estate Investment Trust (REIT)?
A REIT is a company that owns, operates, or finances properties that generate income, such as shopping centers, office buildings, apartments, or hotels. REITs pool money from many investors to buy and manage these properties, allowing individuals to invest in real estate without the responsibilities of ownership.
There are three main types of REITs:
- Equity REITs: These own and manage income-producing properties, like malls or apartment complexes.
- Mortgage REITs: These focus on financing real estate by providing mortgages or buying mortgage-backed securities.
- Hybrid REITs: These combine strategies of both equity and mortgage REITs.
Most REITs are publicly traded on stock exchanges, making them easy to buy and sell, much like stocks. This structure, established by a 1960 law, was designed to make real estate investing accessible to smaller investors.
Key Reasons for the Popularity of REITs
REITs offer several advantages that explain their widespread appeal. Below are the main reasons investors choose REITs, supported by data from top sources.
Accessibility
REITs make real estate investing available to almost anyone. Unlike buying a property, which requires significant money and expertise, REITs have low entry costs. You can purchase shares through a brokerage account with as little as the price of one share, often under $100. This accessibility allows people with smaller budgets to invest in high-value properties like skyscrapers or shopping malls.
Since REITs are managed by professionals, investors don’t need to handle property maintenance, tenant issues, or financing. This hands-off approach is ideal for those new to real estate or lacking time to manage investments .
For tips on starting small, read our guide on How to Invest in Real Estate on a Small Budget.
Steady Income Generation
REITs are a favorite for income-focused investors because they must distribute at least 90% of their taxable income as dividends to shareholders. This legal requirement often leads to higher dividend yields compared to stocks or bonds. For example, retail REITs may generate steady income from tenant rents, which is then passed on to investors.
According to NerdWallet, REITs have historically provided competitive returns driven by these steady dividends, making them attractive for those seeking regular income.
Portfolio Diversification
Adding REITs to your portfolio can reduce risk. Real estate often performs differently from stocks and bonds, a concept known as low correlation. This means when stocks drop, real estate may hold steady or rise, balancing your investments. REITs themselves diversify risk by investing in various property types, such as residential, commercial, or healthcare facilities, across different regions.
Data from REIT.com shows that REITs have a low correlation with other assets, helping to stabilize portfolios and potentially boost returns.
Liquidity
Publicly traded REITs are highly liquid, meaning you can buy or sell shares quickly on stock exchanges during market hours. This is a big advantage over direct real estate, which can take months to sell. Liquidity gives investors flexibility to adjust their portfolios or access cash when needed, making REITs a practical choice .
Professional Management
REITs are run by experienced teams who handle property selection, management, and sales. This expertise can lead to better investment outcomes than managing properties yourself, especially if you lack real estate knowledge. Professional management saves time and reduces stress, appealing to busy or novice investors .
Potential for Capital Appreciation
Beyond dividends, REITs offer the chance for capital gains as property values rise. If the properties in a REIT’s portfolio increase in value, the share price may also grow, benefiting investors. Historical data supports this potential. From 1998 to 2022, REITs averaged 9.7% annual returns, outperforming private real estate’s 7.7% .
Tax Advantages
REITs avoid corporate income taxes by distributing most of their income as dividends, which can lead to higher payouts for investors. You can also hold REITs in tax-advantaged accounts like IRAs, potentially deferring taxes on dividends or gains. However, REIT dividends are typically taxed as ordinary income, so consult a tax professional to understand your situation .
Performance in Different Economic Conditions
REITs have shown resilience during economic challenges. They often benefit from stable, long-term leases, especially in essential sectors like housing or healthcare. Data from REIT.com indicates that REITs outperformed private real estate and stocks during and after the last six recessions, making them a reliable option in uncertain times.
| Benefit | Details |
|---|---|
| Accessibility | Low entry costs; no property management required. |
| Steady Income | High dividends due to 90% income distribution rule. |
| Diversification | Low correlation with stocks; exposure to various property types. |
| Liquidity | Traded on exchanges for easy buying and selling. |
| Professional Management | Expert teams handle property decisions. |
| Capital Appreciation | Potential for share price growth; 9.7% average returns (1998-2022). |
| Tax Advantages | No corporate taxes; benefits in IRAs. |
| Economic Resilience | Outperformed stocks in past recessions. |
How to Invest in REITs
Getting started with REITs is straightforward. Here are three common ways to invest:
- Individual REIT Stocks: Buy shares of specific REITs through a brokerage account. Research their performance and property focus.
- REIT ETFs: Invest in exchange-traded funds that hold a basket of REITs for instant diversification.
- REIT Mutual Funds: Choose mutual funds focused on real estate, including REITs, for a managed approach.
Before investing, review the REIT’s financial health, management team, and sector focus. Consider speaking with a financial advisor to align your choices with your goals. For more on real estate strategies, see our article on Why Commercial Real Estate is a Good Investment.
Addressing Common Questions
Based on online searches, people often ask about REITs. Here are answers to common questions:
- Are REITs safe? REITs carry risks like market fluctuations or interest rate changes, but their diversification and professional management can reduce risk compared to owning properties directly.
- How are REIT dividends taxed? Dividends are usually taxed as ordinary income, but tax-advantaged accounts may offer benefits. Always consult a tax expert.
- How do REITs compare to direct real estate? REITs offer liquidity and lower costs but less control over specific properties compared to direct ownership.
Conclusion
REITs are popular because they make real estate investing simple, affordable, and profitable. Their accessibility, steady dividends, diversification, liquidity, professional management, growth potential, tax benefits, and resilience in tough economic times make them a strong choice for many investors. While risks exist, such as market volatility, the benefits often outweigh the drawbacks for those seeking real estate exposure.
To learn more, check out our related articles on Benefits of Investing in Multifamily Properties and Risks to Avoid in Real Estate Investing.