Investing in REITs – Real Estate Investment Trusts
REITs — real estate investment trusts — allow you to diversify your portfolio by adding a slice of income-producing property. These companies own and manage properties like apartment buildings, hospitals, warehouses, hotels and shopping malls.
They must also return at least 90% of their taxable income in shareholder dividends each year. That steady income makes REITs a favorite among investors.
Investing in REITs
The good news: Investing in REITs is relatively simple. It’s a lot like buying shares of any other publicly traded company. You can buy REIT stocks on your own, or you can use a broker to find REIT mutual funds or ETFs that vet and purchase REITs for you. These funds can be purchased in your brokerage account or even inside of your employer-sponsored retirement accounts.
REITs are required to distribute at least 90% of their taxable income each year as dividends. Look for a REIT with a track record of distributing large and growing dividends. Also, pay attention to the REIT’s ability to generate cash flow, measured by funds from operations, which excludes depreciation.
REITs offer diversification into real estate, which doesn’t typically move in tandem with stocks and bonds. However, owning REITs does carry a certain level of risk, particularly in a rising interest rate environment. NerdWallet’s ratings for online brokers and robo-advisors take into account over 15 factors, including fees and minimums, investment choices, customer support and mobile app capabilities.
Choosing a Broker
Anyone can invest in REITs through a brokerage account, but before investing you need to choose a broker that fits your needs. Different brokers offer different services, fees, investment options and resources, so you’ll want to take the time to compare them before making a decision. You may also wish to consult a financial advisor for expert advice on your specific situation before investing in REITs, as they can help you make the most informed decisions for your personal circumstances and risk tolerance.
Buller believes that REITs will be able to capitalize on trends such as the rise of e-commerce, which will increase demand for warehouse space and manufacturing jobs, as well as the trade tensions with China, which are expected to boost industrial properties like factories and manufacturing plants.
Investing in Individual REITs
REITs are usually not as volatile as stocks, but they can still be susceptible to market fluctuations. As a result, individual REITs can be highly risky investments and require thorough due diligence to determine their merit.
Investors should also consider if the REIT is well-capitalized and whether it is likely to experience high transaction fees or management fees. These fees can reduce a REIT’s profitability and impact its ability to pay dividends.
For these reasons, investing in REITs should be done as part of a diversified portfolio. It is a good idea to work with a broker or investment advisor who can provide personalized advice based on their knowledge of REITs and other investments. This may even include a service that helps you manage your REIT portfolio for a fee. However, not all brokers offer the same services or trading capabilities so it’s important to take your time and compare fees, account options, resources and tools before selecting a broker.
Investing in ETFs or Mutual Funds
You probably have heard the advice “don’t put all your eggs in one basket.” That’s why diversification is a critical part of saving for retirement or any other goal. Two common avenues for investors to diversify are mutual funds and ETFs.
Both offer a professionally managed collection (“basket”) of securities, including REITs. ETFs, however, allow you to choose from a wider range of market sectors, regions, asset classes and investment strategies. ETFs also tend to have lower fees.
ETFs are traded on the stock exchange, just like stocks, and can be bought or sold throughout the day at a calculated price called net asset value. They can be purchased through most online brokers and robo-advisors.
Investing in REITs is an excellent way to diversify your portfolio. But be sure to research all opportunities thoroughly and only invest in those that fit your financial goals. You can open a taxable brokerage account or use a retirement plan, such as a workplace 401(k) or individual retirement account (IRA). The NerdWallet website includes a list of top-rated online brokers and robo-advisors.