Our Guide to REITs

Not everyone has the capital or expertise to buy and manage properties directly. This is where Real Estate Investment Trusts, or REITs, come into play.
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IntroductionWhat is a REITHow do REITs workHow to invest in REITsKey Players in REIT IndustryTaxes for REITsSupport

Introduction

Investing in real estate is often considered a solid way to generate income and build wealth - and it’s safe to say you’ve seen the real estate “moguls” try to influence you to invest in it.

Let’s dive into the world of real estate investing through REITs, so you can figure out if investing in real estate without the hassle is worth it.
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What is a Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate in various sectors such as residential, commercial, and industrial.

REITs provide individual investors with an opportunity to invest in large-scale real estate projects without buying and managing properties themselves.

Typically, when you think of investing in real estate, you’re likely thinking of rental properties or Airbnb’s but REITs are very different.
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Types of REITs

There are primarily three types of REITs:

  • Equity REITs: These REITs own and manage real estate properties. They generate income through rents.
  • Mortgage REITs: These REITs lend money to property owners and operators. They earn money through interest on their loans.
  • Hybrid REITs: A combination of Equity and Mortgage REITs, they both own properties and provide loans.
Infographic titled 'Quick Facts about REITs' showing two overlapping circles. The larger circle states 'REITs own > $4 trillion in total assets,' and the smaller circle states 'Public REITs own $2.5 trillion in total assets.'
REITs own over $4 trillion in assets.
Public REITs own about $2.5 trillion in assets.
Source: Nareit

How Do REITs Work?

REITs pool money from multiple investors to buy and manage real estate assets. They are similar to mutual funds in structure and operate under a strict regulatory framework.

Some of the most popular and largest REITs are managed by Prologis, Public Storage, Simon Property Group, and Starwood Property Trust - these REITs may even own some of the places you’ve been to like apartments, office buildings, shopping malls, and industrial properties.
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REIT Taxation

One key feature of REITs is their tax structure. REITs are required to distribute at least 90% of their taxable income to shareholders, which means they pay little to no corporate income tax.

If they fail to distribute at least 90% of their taxable income, they risk losing their REIT status! The REIT tax structure is designed to encourage REITs to distribute income to their shareholders and to discourage them from engaging in certain activities.
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Investing in REITs vs Traditional Real Estate Investing

  • Liquidity: REITs are often more liquid than traditional real estate investments.
  • Diversification: REITs offer a way to diversify your portfolio with real estate exposure.
  • Lower Capital Requirement: You can invest in a REIT with much less money compared to buying a property.
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Infographic comparing REITs to traditional real estate investing, highlighting three key differences: Liquidity Differences, Capital Requirements, and Diversification. The infographic explains that REITs are more liquid and accessible, allowing for easy buying and selling on stock exchanges, require lower capital, and offer portfolio diversification across various real estate types. Traditional real estate investments are contrasted as less liquid, requiring larger upfront costs and more personalized research for diversification.

How to Invest in REITs

Investing in REITs is similar to investing in stocks. They are traded on major exchanges, and you can buy them through a broker.
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DIY Investing in REITs

  • Research: Look for REITs that have a strong track record and focus on sectors you understand.
  • Buy Shares: Use a brokerage account to buy shares of the REIT.
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Using a Financial Advisor for REIT Investment

  • Expert Guidance: A financial advisor can help you align your REIT investments with your overall financial goals and risk tolerance. If you need help finding an advisor with experience in real estate investing or REITs, you can use AdvisorFinder.

Key Players in the REIT Industry

REITs are a growing industry with several key players that dominate the market.

logos from some of the largest REIT companies


Blackstone and BREIT

  • Blackstone: One of the world’s leading investment firms, Blackstone has a significant presence in the REIT industry.
  • BREIT (Blackstone Real Estate Income Trust): A non-traded REIT that focuses on income-generating real estate.

Quick Fact: Blackstone manages more than $66 billion in real estate assets.
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Prologis

  • Prologis: One of the largest REITs
  • PLD (Prologis): A REIT with $93 billion in assets

Risks and Rewards of REIT Investment

Like any investment, REITs come with their own set of risks and rewards.

  • Pros: High income potential, diversification, and liquidity.
  • Cons: Market volatility, interest rate sensitivity, and management fees.

Diversification in REITs

It’s crucial to diversify your investments, which include your REITs. You can diversify REIT investments across different sectors and geographic locations to mitigate risks.
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Six major types of REITs:

  • Industrial REITs
  • Retail REITs
  • Residential REITs
  • Healthcare REITs
  • Office REITs
  • Mortgage REITs

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Bar chart showing the change in credit risks for U.S. REITs in the industrial and office sectors from October 2022 to October 2023. The chart compares various REIT types, including industrial & office REITs, mortgage REITs, retail REITs, and diversified REITs, with industrial & office REITs showing the most significant increase in credit risk over the period. Data sourced from Credit Benchmark, December 2023.

How You get Taxed with REITs

Like any investment, you’ll be taxed when you sell a REIT or receive a dividend.

  • Capital gains: When you sell your REIT shares, you will be taxed on any capital gains or losses. The capital gains tax rate will depend on how long you held the shares before selling them
  • Qualified dividend deduction: If you hold your REIT shares in a taxable account, you may be eligible for the qualified dividend deduction. This deduction can reduce your taxable income by up to 20% of the amount of qualified dividends you receive
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Diversification in REITs

It’s crucial to diversify your REIT investments across different sectors and geographic locations to mitigate risks.

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Table showing the average annual total return for various REIT subgroups from 1994 to 2021. The subgroups listed include Self-Storage (18.8%), Industrial (15.8%), Residential (14.4%), Health Care (12.7%), Office (12.1%), Retail (12.1%), Diversified (9.3%), and Lodging/Resorts (9.3%). The S&P 500 is also included with an average annual total return of 10.8%. Data source: Motley Fool.
Source: Motley Fool

The Future of REITs

With changing demographics and technological advancements, the REIT industry is poised for potential growth. Sectors like data centers and senior living facilities are emerging as new investment avenues for REITs because of the potential they have.
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Should You Invest in REITs?

The truth is… it depends. With any investment, there are risks associated. The answer to that question is dependent on multiple factors like your own interests in real estate, your financial picture, your investment goals, risk tolerance, and more.

If you’re interested in investing in real estate, REITs are one of several options that check this box, but make sure you ask a financial advisor if you have any questions.

Questions?

If you read through this guide and still have questions, please feel free to contact us. Please direct your questions to our contact page.

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