Some investors want to have access to the real estate sector without actually buying or managing a property. REITs might be a good option for these investors. REITs invest in residential and commercial income-producing properties. REITs are structured like mutual funds. They pool capital from various investors and invest in the real estate sector.
What are REITs?
REITs are companies that invest in various kinds of real estate properties like commercial buildings, hotels, medical and research facilities, apartments, offices, warehouses, and more.
They usually earn revenue through rental income by renting out or leasing properties. As an added benefit, REITs are also dividend stocks. The companies are required to pay 90 percent of their net profits as dividends to shareholders. REITs invest in high priced properties. Investors get a piece of these properties and enjoy capital appreciation and dividend income.
REITs’ performance is often measured by taking into consideration how they have grown their FFO (funds from operations) and AFFO (adjusted funds from operations). The FFO and AFFO reveal how much cash is available to be shared as dividends.
Advantages of REITs
REITs are known for capital appreciation and dividend income, which provides a steady return. REITs are not correlated with any other asset class. As a result, they allow diversification in a portfolio.
Investing in REITs provides the following benefits:
- A steady source of income
- High liquidity and easy to buy and sell because they trade on stock exchanges
- Diversification with a varied choice of REITs
- Transparency about a company with financial data and other information available
- Dividend income
How to invest in REITs
Investing in a REIT is much easier and accessible than investing directly in real estate. REITs trade in normal stock exchanges as common stocks. Investments can also be done through mutual funds and ETFs, which gives investors more diversification.
Look for individual REIT stocks that have shown exceptional growth this year. Some of the best performing REITs stock this year are:
- Power REIT has returned 173 percent YTD as of July 28.
- Pillar stone Capital REIT has returned 12.5 percent YTD.
- Safehold has returned 23.2 percent YTD.
- Taubman Centers has returned 23.0 percent YTD.
- SBA Communications has returned 29.5 percent YTD.
Investors could choose a fund that invests in REITs through a mutual fund company.
Real estate ETFs are another option to invest in a basket of securities in the real estate sector.
Overall, REITs have a lot of advantages. They give investors a safe way to invest in real estate. However, like any other asset class, REITs have some limitations. For example, the dividend income from a REIT is taxable. Also, REITs are not spared from market risks, like any other equity investments. They have maintenance fees and other charges. Therefore, investors should do thorough research before making investment decisions.