Real Estate Investment Trusts allow investors to experience a unique avenue to invest in income-generating real estate assets, including commercial properties, without directly managing or owning the properties.
Here’s a comprehensive guide on how to understand, invest in, and benefit from REITs:
What is REIT?
Real Estate Investment Trusts are essentially investment securities that enable individuals to invest in income-generating real estate, typically commercial properties. Key features of REITs include:
- Publicly Traded: REITs are traded using stock exchanges, which means investors can treat them like stocks, buy or sell them on the exchange like any other stock.
- Income Generation: REITs generate income through properties such as apartments, warehouses, malls, and hotels.
- Dividends: High-quality REITs often pay significant and growing dividends, making them attractive to income-focused investors.
- Risk: Like any investment, REITs carry risks, and investors should carefully assess these before making investment decisions.
Best-Performing REIT Stocks: January 2024
Here are some of the top-performing publicly listed REITs as of January 2024:
- DHC (Diversified Healthcare Trust): 1-year total return of 500.23%, share price $3.74.
- AOMR (Angel Oak Mortgage Inc.): 1-year total return of 145.50%, share price $10.60.
- SEVN (Seven Hills Realty Trust): 1-year total return of 63.58%, share price $12.94.
- SKT (Tanger Outlets): 1-year total return of 61.32%, share price $27.72.
- PK (Park Hotels & Resorts): 1-year total return of 51.12%, share price $15.30.
Best-Performing REIT Mutual Funds: January 2024
Consider these top-performing property-focused mutual funds:
- BREUX (Baron Real Estate R6): 1-year return of 24.69%, expense ratio 1.07%.
- BREIX (Baron Real Estate Institutional): 1-year return of 24.09%, expense ratio 1.07%.
- GREIX (Goldman Sachs Real Estate Securities): 1-year return of 18.17%, expense ratio 0.87%.
- CREYX (Columbia Real Estate Equity Ins3): 1-year return of 17.45%, expense ratio 0.81%.
- GREUX (Goldman Sachs Real Estate Securities R6): 1-year return of 16.17%, expense ratio 0.86%.
Best-Performing REIT ETFs: January 2024
Explore these top-performing REIT ETFs:
- REIT (ALPS Active REIT ETF): 1-year return of 17.19%, expense ratio 0.68%.
- RWR (SPDR Dow Jones REIT ETF): 1-year return of 17.07%, expense ratio 0.25%.
- USRT (iShares Core U.S. REIT ETF): 1-year return of 16.98%, expense ratio 0.08%.
- JPMorgan BetaBuilders MSCI U.S. REIT ETF: 1-year return of 17.07%, expense ratio 0.11%.
- First Trust S&P REIT Index Fund: 1-year return of 16.46%, expense ratio 0.50%.
How do REITs Work?
REITs were created in 1960, allowing people to own equity in large-scale real estate companies. To qualify as a REIT, a company must adhere to IRS standards, including:
- Returning 90% minimum of taxable income as shareholder dividends annually.
- Investing 75% of total assets, at least, in real estate or cash.
- Receiving at least 75% of gross income from real estate sources.
By meeting these criteria, REITs avoid corporate-level taxation, making them an attractive investment option. REITs can be categorized into equity, mortgage, and hybrid REITs, each with distinct characteristics and risks.
Types of REITs
- Equity REITs: Operate like landlords, owning and managing properties. They generate income through rents, providing upkeep, and reinvesting in the properties.
- Mortgage REITs (mREITs): Do not own properties but instead own debt securities backed by real estate. They generate income through interest on mortgages.
- Hybrid REITs: Combine features of both equity and mortgage REITs, owning and operating real estate properties while also holding commercial property mortgages.
Each type can be publicly traded, public non-traded, or private, with varying characteristics and risks.
Publicly-Traded REITs:
- Traded on stock exchanges, offering liquidity and transparency.
- More governance standards and transparency than non-traded REITs.
- Provides the ability to buy and sell readily.
Public Non-Traded REITs:
- Registered with the SEC but not available on exchanges.
- Purchased from brokers participating in public non-traded offerings.
- Highly illiquid, often for eight years or more.
- Limited transparency in valuation.
Private REITs:
- Unlisted and exempt from SEC registration, reducing disclosure requirements.
- Generally open only to accredited investors with higher account minimums and fees.
- Offers less transparency and liquidity.
Pros of Investing in REIT Stocks
- Steady Dividends: REITs, required to pay substantial dividends, offer a consistent income stream.
- High Returns: REITs can outperform equity indexes, providing attractive returns.
- Liquidity: Publicly traded REITs are more liquid than physical properties.
- Lower Volatility: REITs can act as a hedge against the volatility of other asset classes.
Cons of Investing in REIT Stocks
- Illiquid (Non-Traded and Private REITs): Non-traded and private REITs may have extended holding periods before realizing gains.
- Heavy Debt: REITs often carry significant debt, although it is typically supported by regular cash flow.
- Low Growth and Capital Appreciation: REITs may issue new shares and bonds to grow, impacting capital appreciation.
- Tax Burden: Investors must pay taxes on dividends received unless held in tax-advantaged accounts.
Investing in REITs: How to Get Started
- Open a Brokerage Account: Start by opening a brokerage account, enabling you to buy and sell publicly traded REITs easily.
- Consider Tax-Advantaged Accounts: Hold REIT investments in tax-advantaged accounts like IRAs to defer taxes on distributions.
- Explore REIT Funds: Instead of individual stocks, consider REIT mutual funds or ETFs for instant diversification with lower risk.
Engaging in Real Estate Investment Trusts (REITs) provides a distinctive combination of exposure to real estate, income generation, and the potential for capital appreciation. When delving into such investments, it’s essential to conduct comprehensive research and carefully assess personal financial goals and risk tolerance. Making informed investment decisions is vital when it comes to managing personal finances effectively.
