Reits vs Real Estate Investing: A Comprehensive Comparison

Investing in real estate can be a lucrative venture, but it's not the only way to participate in the property market. REITs, or Real Estate Investment Trusts, offer a unique alternative for those who want to invest in real estate without directly managing properties.

REITs are companies that own or finance real estate properties and provide a way for individuals to invest in a diversified portfolio of properties. They can be traded on major stock exchanges, making them a liquid investment option.

One of the key benefits of REITs is that they allow investors to pool their resources with others, spreading risk and increasing potential returns. This is particularly appealing to those who may not have the capital or expertise to invest in individual properties.

REITs also offer a relatively low barrier to entry, with some REITs having minimum investment requirements as low as $100.

Real estate investment trusts (REITs) are companies that own, operate, or finance income-producing real estate across various property sectors.

REITs were created by a 1960 law to make real estate investing more accessible to smaller investors.

By pooling capital from many investors, REITs have changed and funded much of American real estate, often in ways that are not well understood by the public.

REITs allow you to earn income from real estate without having to buy, manage, or finance properties yourself.

REITs offer attractive risk-adjusted returns and stable cash flow through dividends.

Liquidity is a significant advantage of REITs, as shares are relatively easy to buy and sell on public exchanges.

Diversification is another benefit, as including real estate in a portfolio provides a different type of asset class.

REITs provide a way for investors to access a pool of assets without needing to have a large amount of capital.

Here are some of the key advantages of REITs:

However, REITs also have some significant disadvantages. One major drawback is that they don't offer capital appreciation, as REITs must pay 90% of their income back to investors.

REIT dividends are taxed as regular income, which can be a disadvantage for some investors.

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REITs operate like mutual funds, but for real estate instead of stocks and bonds, making illiquid assets like real estate liquid.

Congress established REITs in 1960 through an amendment to the Cigar Excise Tax Extension, enabling firms to pool capital from investors to buy large real estate portfolios.

REITs invest in all kinds of properties, including apartment complexes, data centers, healthcare facilities, hotels, infrastructure, office buildings, retail centers, self-storage units, timberland, and warehouses.

Investors earn returns in two ways: from dividends or an increase in the value of the REIT’s shares.

REITs tend to specialize in specific real estate sectors, like commercial properties, but many hold diversified portfolios of many kinds of properties.

The amount investors have pooled in REITs has risen significantly in the past quarter century—almost exactly tenfold.

You can buy shares in a REIT, which is listed on major stock exchanges, just like any other public stock, or purchase shares in a REIT mutual fund or exchange-traded fund (ETF).

Investors also have the ability to invest in public non-listed REITs and private REITs, but a broker, investment advisor or financial planner can help analyze an investor’s financial objectives and recommend appropriate REIT investments.

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Investing in REITs can be a great way to diversify your portfolio and earn steady income. REITs are companies that own or finance real estate properties, such as office buildings, apartments, and shopping centers.

There are three main types of REITs: publicly traded, public non-traded, and private. Publicly traded REITs are listed on a public exchange, while public non-traded REITs are registered with the SEC but don't trade on exchanges. Private REITs, on the other hand, are not registered with the SEC and can only be sold to institutional investors.

To invest in REITs, you can buy shares in a REIT mutual fund or exchange-traded fund (ETF), or purchase shares directly in a REIT. You can also work with a broker, investment advisor, or financial planner to help you choose the right REIT investment for your goals and risk tolerance.

Here are the main differences between REITs and real estate investing:

It's a good idea to start small and scale up your REIT investment over time. A common starting point is to allocate 2% to 5% of your portfolio to a broadly diversified REIT or REIT fund. As you become more familiar with the real estate market, you can adjust your allocation to suit your goals and risk tolerance.

REITs have historically delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation.

Their comparatively low correlation with other assets makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.

You can invest in REITs through a variety of means, including buying shares in a listed REIT, purchasing shares in a REIT mutual fund or exchange-traded fund (ETF), or investing in public non-listed REITs and private REITs.

It's a good idea to start small and scale up your REIT investment over time, beginning with a modest allocation of 2% to 5% of your portfolio and gradually increasing your exposure as you become more familiar with the real estate market.

The right amount of REITs in your portfolio will depend on your financial goals, risk tolerance, and investment timeline, and a well-diversified portfolio might include a 5% to 15% allocation to real estate.

A broker, investment advisor or financial planner can help you analyze your financial objectives and recommend appropriate REIT investments.

On a similar theme: Reit Investment Returns

Monthly payment options are available for some REITs, but it's not a universal feature. Most REITs pay quarterly, while some pay monthly, and a few pay annually or semiannually.

Some REITs offer a steady income via dividends, making them attractive to income-focused investors. However, the frequency of payments doesn't necessarily indicate higher returns or better financial health for the REIT.

According to the U.S. Securities and Exchange Commission, the dividend schedule for REITs varies. This means you should research the specific REIT you're interested in to understand their payment schedule.

If you're looking for a REIT that pays monthly, you may want to consider Healthpeak Properties, which has a clear strategy for delivering steady income to investors. Their annual reports and investor relations materials can provide more information on their payment schedule.

Here's a breakdown of the different payment schedules for REITs:

Keep in mind that the payment schedule is just one factor to consider when investing in REITs. It's essential to research the REIT's financial health, returns, and overall strategy before making a decision.

There are three major types of REITs: equity REITs, mortgage REITs, and hybrid REITs. Equity REITs own and manage income-producing real estate, generating revenues primarily through rent.

Equity REITs make up 96% of the market share, owning and operating income-producing real estate. Mortgage REITs, on the other hand, lend money to real estate owners and operators, earning income from the interest on these investments.

A key fact to note is that REITs have a strong track record of reliable and growing dividends, combined with long-term capital appreciation through stock price increases. This has provided investors with attractive total return performance for most periods over the past 45 years compared to the broader stock market and other assets.

Here's a breakdown of the different types of REITs:

Diversifying across REIT categories can help balance your portfolio and reduce risk. The majority of REITs, 96% in 2023, are equity-based and own and manage income-producing real estate.

To spread your investments across real estate sectors, consider the different property categories, such as residential, commercial, healthcare, and more. This can help you balance your portfolio and reduce risk.

Here's a breakdown of the different property categories and their characteristics:

By diversifying across REIT categories, you can reduce your reliance on any one type of property or sector, which can help you ride out market fluctuations and achieve more stable returns.

REITs have a strong track record of providing reliable and growing dividends, combined with long-term capital appreciation through stock price increases.

Over the past 45 years, REITs have consistently outperformed the broader stock market and bonds in terms of total return performance.

Listed REITs are professionally managed, publicly traded companies that aim to maximize shareholder value by positioning their properties to attract tenants and earn rental income.

This approach drives total return performance for REIT investors, who benefit from a strong, reliable annual dividend payout and the potential for long-term capital appreciation.

Residential REITs, in particular, have performed well over the years, driven by fairly recession-resilient demand and rents that expand at market rates each year.

One factor behind rent growth is the lack of affordable single-family homes, which causes more people to continue renting.

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REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation.

Their comparatively low correlation with other assets makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.

REITs offer a way to invest in real estate without directly owning physical properties, which can be a major advantage for those who don't have the resources or expertise to manage properties.

Their high, steady dividend income can provide a regular source of returns for investors, making them a popular choice for income-seeking investors.

Their low correlation with other assets means that REITs can help reduce overall portfolio risk and increase returns, making them a great addition to a diversified investment portfolio.

REITs have historically delivered competitive total returns, making them a great option for investors looking for a stable source of returns.

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REITs have consistently outperformed the stock market over the years.

The average annual total return of self-storage REITs since 1994 is 17.3%, outpacing the S&P 500's 10.1%. This is due to low construction and operating costs, making most units profitable at low occupancy rates.

Residential REITs have also performed well, with a 12.7% average annual total return since 1994. This is driven by fairly recession-resilient demand and rents that expand at market rates each year.

Some individual REITs stand out as consistent long-term outperformers. Data center REIT Equinix has delivered a 485% total return (19.3% annualized) over the past decade, while self-storage REIT Extra Space Storage has delivered a 440% total return (18.4% annualized).

Here's a comparison of the average annual total return of various REIT subgroups since 1994:

REITs are also less volatile than the stock market, with a long-term beta of 0.75. This means they are less affected by market fluctuations, making them a great addition to a diversified portfolio.

REITs have a specific tax structure that can greatly impact your returns. They distribute at least 90% of their taxable income to shareholders as dividends, resulting in a pass-through structure.

This pass-through structure can result in higher dividend yields for investors, but unlike qualified dividends from stocks, most REIT dividends are taxed as ordinary income.

Most REIT dividends are taxed as ordinary income, which could result in higher tax bills, especially for investors in higher tax brackets.

Holding REITs in tax-advantaged individual retirement accounts (IRAs) or 401(k)s can mitigate these tax impacts, allowing REIT dividends to compound tax free or tax deferred.

The Tax Cuts and Jobs Act of 2017 introduced a qualified business income (QBI) deduction with specific benefits for those holding REITs, allowing eligible taxpayers to deduct up to 20% of their qualified REIT dividends.

The combination of these factors creates a complex but potentially beneficial tax situation for many REIT investors, but balancing this approach as part of your overall investment strategy and liquidity needs is crucial.

Many REITs also use leverage to buy up more properties, making it essential to look at their debt-to-equity ratios to ensure you're not putting money into a venture sinking under its debt.

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Dividends drive much of REIT returns, with 41% of the S&P 500's total return since 1930 coming from dividend income, according to Morningstar and Hartford Funds.

REITs have a unique dividend policy, as they must distribute 90% of their taxable net income via dividends to investors to remain in compliance with IRS guidelines. This means that REITs have a strong focus on generating income for their shareholders.

Companies that paid a dividend outperformed non-payers by a wide margin from 1973 through the end of 2022, with an average annual total return of 9.2% compared to -0.6%.

Dividend growth tends to drive higher returns, which is one reason why the REIT sector has a strong long-term performance. Many REITs have a history of increasing dividends.

Some REITs pay monthly, while others pay quarterly or annually. However, the frequency of payments doesn't necessarily indicate higher returns or better financial health for the REIT.

Here are some key statistics on REIT dividend performance:

Valuation is a crucial aspect of investing in Real Estate Investment Trusts (REITs). REITs, unlike direct real estate investments, can be valued using traditional stock valuation methods.

The key to valuing a REIT is to understand its financial performance and compare it to the overall market.

To determine a REIT's value, investors can use metrics such as the price-to-earnings ratio, which is a common method for valuing stocks.

A high price-to-earnings ratio may indicate that a REIT is overvalued, while a low ratio may suggest it's undervalued.

Additional reading: Reits Stock Price

Equinix, the data center REIT, has been the sector leader in the past decade, with a total return of 485% (19.3% annualized) as of 2023.

This impressive performance can be attributed to the company's ability to acquire other operators and organically expand its global platform, resulting in 21 years of consecutive quarterly revenue growth.

Extra Space Storage, another standout REIT, delivered the second-best performance over the past 10 years with a total return of 440% (18.4% annualized).

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The company's above-average NOI growth, acquisitions, and expanding third-party management platform have driven 695% core funds from operations (FFO) growth since 2011 and 548% dividend growth over the past 10 years.

Prologis, the leading industrial REIT, has outpaced the S&P 500's total return during the past three-, five-, and 10-year periods, as well as since its formation in 1998.

Here's a comparison of Prologis' core FFO and dividend growth with its peers:

Realty Income, a retail REIT, has produced a 13.9% compound average annual total return since its initial public offering in 1994, with a steadily rising dividend contributing to its market-crushing total annualized returns.

The company has increased its payout for 105 straight quarters as of early 2024 and 123 times overall, giving it more than a quarter century of annual dividend growth, with a 4.3% compound annual rate since 1994.

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There are several ways to invest in REITs, including publicly traded REITs, public non-traded REITs, and private REITs. Publicly traded REITs are listed on a public exchange, where they can be bought and sold by individual investors.

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Shares of publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC), providing a level of protection for investors. Public non-traded REITs, on the other hand, are less liquid and tend to be more stable due to their lack of market volatility.

Private REITs are not registered with the SEC and are generally sold only to institutional investors, making them a higher-risk investment option. However, they can also be a legitimate investment opportunity.

Here are the different types of REIT investments:

Investors can also invest in REITs through mutual funds and exchange-traded funds (ETFs), which can provide a diversified portfolio and reduce overall risk.

The data on REITs is clear: they've outperformed stocks over the long term, thanks partly to their dividends, and with less volatility. This is especially true when you consider that many subsectors and specific REITs have delivered even higher returns.

REITs have been a boon for the average investor, making them a great addition to any portfolio. The U.S. Congress created REITs to level the playing field so all investors could access income-producing, wealth-creating real estate.

Investors should strongly consider adding REITs to their portfolios by either investing in a REIT ETF or purchasing shares of specific REITs. Calculated by Time-Weighted Return since 2002, REITs have consistently shown their value.