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buzbuzzer/Getty Images October 12, 2022 Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Investing in real estate can be an attractive way to put your money to work for you — but what if you don’t have enough money to buy property outright? One way to start without the need for a large chunk of capital is to buy shares of a real estate investment trust, or REIT. They pay out substantial , which can make them a great pick for income investors, although they come with a fair share of disadvantages, too. Here are the details on REITs, their pros and cons and how much you could earn on them. What is a real estate investment trust REIT
A real estate investment trust (REIT) is a company that owns, finances or manages properties and then is required by law to pay most of that income to investors. This income can come from the rents that the properties’ tenants pay or even from mortgage payments on loans owned by the REIT. In exchange for paying out most of its taxable income, the REIT is able to avoid taxation on its earnings at the corporate level. This legal structure makes it easier and cheaper for REITs to acquire real estate, meaning they can acquire property more easily than non-REITs can. In essence, a REIT profits from its real estate holdings and shareholders have a chance to profit as well. You can enjoy capital appreciation when the REIT’s share price increases as well as benefit from regular quarterly dividend payouts. Many REITs specialize in a specific type of property but others have more diverse portfolios. With a REIT, you have access to real estate without the need for a substantial amount to actually purchase property or buy into a real estate investment club. Shares of publicly traded REITs can be bought and sold on major exchanges. How REITs work
In order to be considered a REIT, a company must meet certain : At least 75 percent of the company’s assets must be invested in real estate. At least 75 percent of the company’s gross income must come from interest on mortgages, sales of real estate or rents received from properties. The company must be taxed as a corporation and managed by trustees or a board of directors. There must be at least 100 shareholders, and no more than 50 percent of its shares can be held by five or fewer people. At least 90 percent of a REIT’s taxable income each year must be paid out to shareholders as dividends. As long as it meets these criteria, a company can elect to be treated as a REIT, though it doesn’t have to. Then it may enjoy no corporate taxation and generate hefty dividend payouts. Types of REITs
There are two main types of REITs: Equity REITs – These REITs actually own properties that produce income, such as apartment buildings, commercial buildings and other types of properties, like storage facilities. They own these assets and make money as their tenants pay rent, or when they sell properties at a gain. Mortgage REITs – Rather than buying properties and charging rent, mortgage REITs (mREITs) provide financing for real estate. They might purchase mortgages, or even originate them, or buy , to produce income. REITs can also be classified on whether they’re publicly traded, non-traded or private: With a publicly traded REIT, any investor can purchase the REIT’s stock on an exchange. Non-traded REITs, also called , don’t trade on exchanges, even though they’re registered with the Securities and Exchange Commission (SEC) Private REITs aren’t registered with the SEC and can be bought without going through an exchange. However, these might be less liquid and transparent than public REITs, so they come with serious risks. Along with their status, a REIT can fall into the following property : Data centers Diversified (or a combination of properties) Healthcare Industrial (e.g., warehouses) Infrastructure (e.g., energy pipelines) Lodging Mortgage (mREIT) Office Residential Retail Self-storage Specialty (e.g., casinos) Timberland And new sub-sectors may develop at any time, as the industry evolves. How to find REITs
If you’re looking to find a list of all REITs, you’ll find them on the , an association that represents REITs. You’ll be able to filter them on basic criteria such as their filing status, returns and sub-sector. You’ll also be able to find information on any REIT registered with the SEC, including non-traded REITs and publicly traded REITs. Each type of REIT files financial disclosures with the SEC, so investors and others can see how they are performing. You can find the filings in the , which goes back more than two decades. How to invest in REITs
is fairly straightforward, especially if you focus on publicly traded companies. In that case, all you need to know is the ticker symbol. You can then go to your broker and buy shares, placing an order like you would for any other stock. You can also buy shares in REIT ETFs, including one of the most popular, the Vanguard Real Estate Index Fund (VNQ). On top of that, you might be able to allocate a portion of your regular contribution to a REIT. Some plans include a REIT fund as an option. However, while individual equities aren’t always included in a 401(k), if your administrator does allow them, you can purchase REITs. Do REITs have a good track record
REITs have a good track record over time. The FTSE Nareit All Equity REITs index recorded annualized returns of approximately 11.5 percent over the 40-year period ending June 2021, according to Nareit. By comparison, the historically sees annualized returns closer to 10 percent. While some indexes, like the , outperform REITs over shorter periods of time, REITs tend to see better performance in the long run. It’s important to note, however, that past performance isn’t a guarantee that REITs will perform well in the future. Advantages and disadvantages of REITs
REITs can be an attractive investment, but like all investments, they can also come with their own risks and disadvantages. Here are some key advantages and disadvantages of REITs: Advantages of REITs
High dividend yields: REITs typically offer some of the highest yields in the stock market, because they’re obligated to make payouts and they have consistent cash flow from their rentals. Diversification: By owning a REIT you may own dozens, even hundreds, of properties, meaning that your own risk is reduced by diversification, unlike if you owned one or two properties in a single geographic area. Lower correlation with other assets: With less correlation to other assets, REITs can add some lower volatility to your portfolio. When stocks zig, REITs may zag, or at least zig a little less than stocks. No self-management: If you’re managing your own property, you may be called on at any point to fix something, which may require you to get out and do it or otherwise pay someone else to do it. You may also be on the hook for serious money if something breaks. So REITs can be a . No commissions (on publicly traded REITs): Unlike real estate and private and non-traded REITs, you can move in and out of REITs with effectively no commissions. That’s a huge contrast with traditional real estate, where you can expect to pay 6 percent every time you sell. Disadvantages of REITs
High debt loads: It’s normal for REITs to operate with high debt loads, just like regular homeowners do. But investors need to check to make sure the REIT can sustain the debt load and keep on paying its dividend, or the stock will fall. Beholden to market to grow: Because REITs pay out so much of their cash flow, they must raise money from the market to acquire more buildings and grow. When the market is uncooperative – with low stock prices or high interest rates – then it’s hard for REITs to make attractive deals. Unsustainable dividends: Investors must remain on the lookout for unsustainable dividends. A dividend cut (or a potential one) will hurt the REIT stock price quickly. Rising rates: Rising rates may hurt REITs in a few ways, by raising the cost of their financing, reducing the value of their assets (buildings) and depressing their stock price. Governance issues: Non-traded REITs and private REITs have potentially serious governance issues and don’t have the same higher standards as publicly traded REITs. High commissions and no secondary market: If you’re buying non-traded or private REITs, you should also watch out for massive sales commissions and understand that it will be difficult for you to exit the position, regardless of what the salesperson says. REITs can be an attractive investment, but you’ll want to steer clear of . Should you invest in REITs
Depending on your risk tolerance and portfolio goals, adding some real estate exposure through REITs could help you further diversify and provide exposure to another that may lower risk in your portfolio. Carefully consider your individual situation and consult with an investment professional to decide if investing in REITs makes sense for you, and how much you should allocate to them. — Miranda Marquit wrote a previous version of this story. SHARE: Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles