The Complete Guide to Investing in REITs

Investing in REITs can be a great way to diversify your portfolio and earn rental income without directly managing properties. REITs are required to distribute at least 90% of their taxable income to shareholders each year.

To get started, you'll need to choose a brokerage account that allows you to buy and sell REITs. Some popular options include Fidelity, Vanguard, and Robinhood.

REITs can be categorized into several types, including equity REITs, mortgage REITs, and hybrid REITs. Equity REITs, which make up the majority of REITs, own or finance income-generating properties.

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A Real Estate Investment Trust, or REIT, is a company that owns or finances real estate properties and provides a way for individuals to invest in real estate without directly owning physical properties.

REITs can be publicly traded on major stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ, or privately held, and they offer a unique opportunity to diversify your investment portfolio.

Most REITs are required to distribute at least 90% of their taxable income to shareholders each year, providing a regular income stream.

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A REIT, short for Real Estate Investment Trust, is a company that owns or finances real estate properties and provides a way for individuals to invest in real estate without directly managing properties.

REITs allow individuals to diversify their investment portfolios by including real estate, which can provide a steady stream of income and potential long-term growth.

By pooling funds from many investors, REITs can purchase and manage larger, more valuable properties than individual investors could on their own.

REITs can be publicly traded on major stock exchanges, making it easy for anyone to buy and sell shares, or they can be privately held, requiring a minimum investment.

There are several types of REITs, including equity REITs, mortgage REITs, and hybrid REITs, each with its own investment strategy and risk profile.

Equity REITs own and operate income-generating properties, such as office buildings, apartments, and shopping centers, providing a steady stream of rental income.

Mortgage REITs, on the other hand, focus on lending money to real estate developers and property owners, earning interest on those loans.

Hybrid REITs combine elements of both equity and mortgage REITs, investing in properties while also making loans to other real estate investors.

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A Real Estate Investment Trust, or REIT, is a company that owns or finances real estate properties, such as office buildings, apartments, and shopping centers.

REITs are required to distribute at least 90% of their taxable income to shareholders each year, making them a popular choice for investors looking for regular income.

One of the key benefits of REITs is that they provide a way for individuals to invest in real estate without having to directly manage properties or handle day-to-day operations.

REITs can be publicly traded, allowing anyone to buy and sell shares on major stock exchanges like the New York Stock Exchange.

Publicly traded REITs must follow strict regulations and reporting requirements, providing investors with a high level of transparency and accountability.

By pooling funds from many investors, REITs can purchase and manage large properties that might be out of reach for individual investors.

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Investing in REITs can provide a steady stream of income through dividends, with some REITs offering dividends well above what traditional dividend stocks have to offer.

Diversifying your portfolio is essential for managing risk, and REITs can make it easier to do so by giving you access to multiple properties within a single investment vehicle.

REITs offer a hands-off investing experience, allowing you to reap the benefits of property ownership without the added stress and responsibility of managing actual rental properties.

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Investing in REITs can provide a steady stream of income through dividends, with some REITs offering payouts well above those of traditional dividend stocks.

REITs can make it easier to diversify your portfolio, giving you access to dozens of properties within a single investment vehicle.

Managing rental properties can be a headache, but investing in REITs lets you reap the benefits without the added responsibility.

Real estate has a low correlation with stocks, making REITs a good option for smoothing out market volatility.

It's smart to invest in a range of assets to avoid being overly reliant on any one company or market to do well.

By investing in different sectors, you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Consider reading: Reits in Portfolio

A lower Loan to Value (LTV) ratio is a better indicator of financial stability.

This is because a lower LTV ratio means you're borrowing a smaller amount of money compared to the value of the underlying asset, which reduces your risk of defaulting on the loan.

For instance, if you're buying a house worth $200,000 and you borrow $150,000, your LTV ratio is 75%. This is a relatively safe position, as you're not overextending yourself financially.

A higher LTV ratio, on the other hand, increases your risk of defaulting on the loan.

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You can invest in REITs through a brokerage, making it easy to open a trading account if you don't have one yet.

REIT mutual funds offer a convenient way to diversify your portfolio by investing in a collection of REITs with a single vehicle. You can find REIT mutual funds offered through a brokerage or even purchase them through a 401(k) or similar workplace retirement plan if they're on your plan's list of approved investments.

Consider the underlying property investments and the expense ratio when researching REIT funds, as the expense ratio represents the annual cost of owning the fund.

Worth a look: Can You Do a 1031 Exchange into a Reit

You can find REITs offered through brokerages, making it easy to add them to your portfolio if you don't have a trading account yet.

Opening a trading account is a straightforward process that can be completed online or through a brokerage's mobile app.

There are a few ways to invest in REITs, including buying them directly or through a mutual fund.

REIT mutual funds allow you to own a collection of investments in a single vehicle, which can be a convenient way to diversify your portfolio.

To research REIT funds, consider the underlying property investments and check the expense ratio, which represents the annual cost of owning the fund.

You can find REIT mutual funds offered through a brokerage, and some may also be available through your 401(k) or similar workplace retirement plan.

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Distribution Yield is a key metric to consider when investing in REITs. It measures the annual income payments made to unitholders as a percentage of its unit price.

A higher distribution yield is generally better, as it indicates a higher return on investment. This can be a major advantage for investors looking to generate income from their REIT investments.

For example, if a REIT has a unit price of $100 and pays out $6 per year, its distribution yield would be 6%. This means that for every dollar invested, you can expect to earn 6 cents in annual income.

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There are three main categories of REITs: equity, mortgage, and hybrid. Equity REITs own properties that produce income, such as office buildings with units leased to multiple tenants.

Mortgage REITs, on the other hand, don't own property and instead generate income from the interest on mortgages and mortgage-backed securities. They can potentially produce higher yields for investors, but they can also be riskier investments.

Some REITs specialize in owning land instead of property, such as timberland or farmland.

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There are three main categories of REITs: equity, mortgage, and hybrid. Equity REITs own properties that produce income, such as office buildings with leased units.

Equity REITs generate income through rent paid by tenants, making them a relatively stable investment option. Mortgage REITs, on the other hand, don't own property, instead generating income from the interest on mortgages and mortgage-backed securities.

Mortgage REITs can potentially produce higher yields, but they can also be riskier investments, so it's essential to understand the risks involved. Hybrid REITs own both income-producing properties and commercial mortgages, offering a combination of stability and potential for higher yields.

Some REITs specialize in owning land instead of property, such as timberland or farmland. This type of investment can provide a unique opportunity for investors to diversify their portfolios.

Suggestion: Hybrid Investment

Occupancy is a crucial metric in real estate investing, and REITs are no exception. It's a percentage of available space occupied by tenants, and the higher the better.

A high occupancy rate can lead to more stable cash flows and lower vacancies, which is a win-win for investors.

In fact, a higher occupancy rate often translates to higher rental income and increased property value.

Investing in REITs has several benefits, including above-average dividend yields compared to other stocks, making them ideal for those seeking passive income from real estate.

One of the biggest advantages of REITs is their diversification potential, as they tend to be less volatile than other stocks. This can be a game-changer for investors looking to spread their risk.

REITs also offer attractive total return potential, combining stock price appreciation with dividend income. I've seen this play out in many successful REIT investments.

They don't pay federal corporate income tax, shielding investors from "double taxation." This can be a significant advantage for investors in a tax-advantaged account.

Publicly traded REITs offer greater liquidity compared to owning real estate outright, making it easier to buy and sell shares.

Here are some of the key pros of investing in REITs:

However, REITs also have some drawbacks to consider. One of the main cons is their sensitivity to changes in interest rates, which can cause stock prices to decline as interest rates rise.

Related reading: What Happens to Reits When Interest Rates Go down

Higher tax liabilities are another concern, as REITs pay nonqualified dividends, which can lead to higher tax bills. This is why it's often best to hold REITs in a tax-advantaged account.

Property-specific risks, such as tenant move-outs and industry headwinds, can also impact REIT investments. And, of course, there's the risk of using too much debt, which can be a major concern for REITs.

You can buy REITs through a brokerage account, making it relatively easy to get started. Most REITs trade below $100 a share, making them a relatively inexpensive investment option.

You can also invest in REITs through a mutual fund or exchange-traded fund (ETF) focused on REITs. These funds are easy to buy and relatively inexpensive to purchase.

Investing in public non-traded REITs is a bit more challenging and often requires a minimum investment of $2,500 or more to start.

Broaden your view: Non Traded Reits

You can buy REITs through a brokerage account, making it relatively easy to invest in real estate without directly owning physical properties. Most REITs trade below $100 a share, making them relatively inexpensive to buy.

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To invest in REITs, you can also consider buying a mutual fund or exchange-traded fund (ETF) focused on REITs. These funds are easy to buy and relatively inexpensive to purchase, making them a great option for those new to REIT investing.

You can find REITs offered through brokerages, and it's easy to open a trading account if you don't have one yet. This allows you to browse the list of REITs available and decide how many shares you want to buy.

Here are some ways to buy REITs:

REIT ETFs can be an attractive option if you're looking for an easy way to diversify or more flexibility when it comes to trading. They often have lower expense ratios and can be more tax-efficient than traditional mutual funds.

Pebblebrook Hotel is a great option to consider when investing in REITs. It's the largest US lodging REIT focused on owning independent and boutique hotels.

Pebblebrook Hotel offers a forward dividend yield of 0.27%, the lowest on the list. This is a relatively low dividend yield compared to other REITs.

The company owns 46 upper upscale hotels with more than 11,900 rooms, located primarily in urban gateway markets. This extensive portfolio provides a solid foundation for growth.

Pebblebrook Hotel merged with LaSalle Hotel Properties in November 2018, doubling in size while taking on only a portion of the general and administrative costs. This merger has made the combined company more efficient.

The coronavirus pandemic hit the operating results of Pebblebrook's hotels significantly, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to recover quickly.

Here are some key statistics about Pebblebrook Hotel:

Americold is a unique industrial REIT that stands out from the rest. It trades 26% below the Morningstar fair value estimate of $31.50 per share, making it a relatively cheap stock to buy.

The company owns and operates cold storage warehouses that store perishable food products, pharmaceuticals, florals, and chemicals. Its main business is warehouse rent and storage, accounting for 89% of revenue in 2023.

Americold's warehouses are considered among the best in terms of quality and location, with four-fifths of them located in North America. The company also provides ancillary services like flash freezing and picking/packing to attract and retain customers.

Americold has a transportation services segment that brokers, manages, and operates transportation for its customers. This segment is a significant part of the company's business, alongside the warehouse services segment.

Here are some key statistics about Americold:

Americold's fundamentals have recovered in recent quarters as food manufacturers ramp up production and supply chain issues abate. The company is expected to achieve mid-single-digit net operating income growth in the upcoming decade.

Crown Castle is a specialty REIT that owns and leases cell towers and fiber, making it the only company on our list with an economic moat.

Its stock is trading 24% below Morningstar's estimated fair value of $135, offering a forward dividend yield of 6.14%.

Crown Castle's tower business is fantastic, with a portfolio of 40,000 towers that has remained relatively flat over the last decade.

This has led to minimal capital investment to drive growing cash flow, with organic revenue growth driven by a fixed annual escalator of roughly 3% and carriers adding new equipment to incremental or existing towers.

Crown Castle's tower business entails wireless carriers leasing space on towers to install antennas and other communication equipment to power their networks.

Consumers' mobile data consumption is rapidly expanding, and we believe carriers will need to continue expanding and densifying their networks to meet demand.

Here are some key facts about Crown Castle:

Management's new strategy to invest less in the fiber business is smart, as we're skeptical about the firm's ability to earn sufficient returns on its fiber investment.

By building colocated nodes on the existing fiber footprint, a much less capital-intensive approach than previous, Crown Castle is making a wise decision.

When buying REITs, it's essential to understand the distribution yield, which is the annual income payments made to unitholders as a percentage of its unit price. A higher distribution yield is generally better.

The FY 24 Projected Distribution split gives us a glimpse into the expected income distribution for each REIT. Let's take a closer look at the numbers.

The Issue Date for Brookfield, Embassy, Mindspace, and Nexus are Feb-21, Apr-19, Aug-20, and May-23 respectively. This is important to note as it affects the distribution yield.

Brookfield's Issue Price is 275, while Embassy's is 300, Mindspace's is 275, and Nexus's is 100. The Current Price is not provided, but we can look at the NAV as of March '24, which is 344 for Brookfield, 415.84 for Embassy, 392.6 for Mindspace, and 147 for Nexus.

The Distribution till date for Brookfield is 69.15, Embassy is 122.1, Mindspace is 76.5, and Nexus is 11.225. This gives us an idea of the total distribution made so far.

Here's a summary of the FY 24 Projected Distribution split for each REIT:

These numbers give us an idea of the expected distribution yield for each REIT. Keep in mind that past performance is not a guarantee of future results, so it's essential to do your research and consider multiple factors before making an investment decision.