What is a REIT?
REIT — rhymes with “ dulcet ” — stands for real estate of the realm investment confidence, and its popularity is growing for investors who seek to expand their portfolio beyond publicly traded company stocks or reciprocal funds. REITs are companies that own ( and frequently function ) income-producing real estate of the realm, such as apartments, warehouses, self-storage facilities, malls and hotels. Their entreaty is simple : The most dependable REITS have a track read for paying big and growing dividends. still, that potential for growth carries risks that vary depending on the character of REIT.
How do REITs work?
Congress created real estate investment trusts in 1960 as a room for individual investors to own equity stakes in large-scale real estate companies, just as they could own stakes in other businesses. This act made it easy for investors to buy and trade a diversify real-estate portfolio. REITs are required to meet sealed standards set by the IRS, including that they :
- Return a minimum of 90 % of taxable income in the shape of stockholder dividends each year. This is a large draw for investor pastime in REITs .
- Invest at least 75 % of full assets in veridical estate of the realm or cash .
- Receive at least 75 % of gross income from real estate, such as real property rents, interest on mortgages financing the real place or from sales of real estate of the realm .
- Have a minimum of 100 shareholders after the first gear year of universe .
- Have no more than 50 % of shares held by five or fewer individuals during the concluding half of the taxable year .
By hewing to these rules, REITs don ’ t have to pay tax at the bodied level, which allows them to finance real estate more cheaply than non-REIT companies can. This means that over time, REITs can grow bigger and pay out even larger dividends. » Related : Understand unlike types of real estate investments
NerdWallet rating NerdWallet ‘s ratings are determined by our column team. The scoring convention for on-line brokers and robo-advisors takes into history over 15 factors, including report fees and minimums, investment choices, customer hold and mobile app capabilities .
NerdWallet rating NerdWallet ‘s ratings are determined by our column team. The scoring recipe for on-line brokers and robo-advisors takes into account over 15 factors, including history fees and minimums, investment choices, customer corroborate and mobile app capabilities .
NerdWallet rating NerdWallet ‘s ratings are determined by our editorial team. The scoring formula for on-line brokers and robo-advisors takes into bill over 15 factors, including account fees and minimums, investment choices, customer support and fluid app capabilities .
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Types of REITs
REITs fall into three wide categories divided by their investment holdings : fairness, mortgage and hybrid REITs. Each class can further be divided into three types that speak to how the investment can be purchased : publicly traded REITs, populace non-traded REITs and private REITs. Each REIT type has different characteristics and risks, so it ’ randomness important to know what ’ mho under the hood before you buy.
REIT types by investment holdings
equity REITs : equity REITs operate like a landlord. They own the underlying real estate, provide care of and reinvest in the property and collect economic rent checks — all the management tasks you associate with owning a property. mortgage REITs : Unlike equity REITs, mortgage REITs ( besides known as mREITs ) do n’t own the underlying property. alternatively, they own debt securities backed by the property. For exercise, when a family takes out a mortgage on a house, this type of REIT might buy that mortgage from the original lender and collect the monthly payments over time. meanwhile, person else — the family, in this exemplar — owns and operates the place. mortgage REITs are normally significantly more hazardous than their fairness REIT cousins, and they tend to pay out higher dividends. loanblend REITs : loanblend REITs are a combination of both fairness and mortgage REITs. These businesses own and operate real estate properties deoxyadenosine monophosphate well as own commercial property mortgages in their portfolio. Be sure to read the REIT prospectus to understand its primary focus. » Which is better ? real estate vs. stocks
REIT types by trading status
Publicly traded REITs : As the name suggests, publicly traded REITs are traded on an rally like stocks and ETFs, and are available for buy using an ordinary brokerage account. There are more than 200 publicly traded REITs on the market, according to the National Association of Real Estate Investment Trusts, or Nareit. Publicly traded REITs tend to have better government standards and be more guileless. They besides offer the most melted broth, meaning investors can buy and sell the REIT ’ s stock readily — a lot faster, for example, than investing and selling a retail property yourself. For these reasons, many investors buy and sell entirely publicly traded REITs. public non-traded real estate investment trust : These REITs are registered with the SEC but are not available on an commute. rather, they can be purchased from a broker that participates in public non-traded offerings, such as on-line real estate broke Fundrise. ( Nareit maintains an on-line database where investors can search for REITs by listing condition ). Because they aren ’ triiodothyronine publicly traded, these REITs are highly illiquid, much for periods of eight years or more, according to the Financial Industry Regulatory Authority. Non-traded REITs besides can be arduous to value. In fact, the SEC warns that these REITs much don ’ t estimate their prize for investors until 18 months after their propose closes, which can be years after you ’ ve invested. several on-line trade platforms allow investors to purchase shares in populace non-traded REITs, including Modiv, the Diversy Fund and Realty Mogul. secret REITs : not only are these REITs unlisted, making them hard to value and trade, but they besides generally are excuse from SEC adjustment : As such, private REITs have fewer disclosure requirements, potentially making their performance hard to evaluate. These limitations make these REITs less attractive to many investors, and they carry extra risks. ( See this helpful warning from FINRA on public non-traded REITs and secret REITs. ) public non-traded REITs and individual REITs besides can have much higher report minimums — $ 25,000 or more — to begin trade, and steeper fees than publicly traded REITs. For that argue, private REITs and many non-traded REITs are receptive alone to accredited investors with a net worth ( excluding the value of their elementary residence ) of $ 1 million or more, or annual income in each of the past two years of at least $ 200,000 if individual or $ 300,000 if married.
Best-performing REIT stocks: June 2022
here are some of the lead do publicly listed REITs so far this year :
|symbol||caller||real estate investment trust performance ( 1-year total return )||share monetary value|
|BRG||Bluerock Residential Growth REIT, Inc .||190.6 %||$ 26.70|
|APTS||Preferred Apartment Communities, Inc .||149 %||$ 24.84|
|IVT||InvenTrust Properties Corp .||137.6 %||$ 31.10|
|WSR||Whitestone REIT||48 %||$ 11.89|
|CXW||CoreCivic||40.4 %||$ 13.06|
rather than purchase individual REITs, you can besides invest in REIT common funds and ETFs to get instantaneous diversification at an low-cost price. here are some peak perform property-focused common funds and ETFs the past year :
Best-performing REIT mutual funds: June 2022
|symbol||investment company name||Year-to-date tax return %||Gross expense proportion|
|FSREX||Fidelity Series Real Estate Income||-5.8 %||0 %|
|FIKMX||Fidelity Advisor Real Estate Income Z||-7.3 %||0.6 %|
|FRIFX||Fidelity Real Estate Income||-7.3 %||0.72 %|
|FRIRX||Fidelity Advisor Real Estate Income I||-7.4 %||0.71 %|
|PRKQX||PGIM Real Estate Income R6||-8.4 %||1.1 %|
Best-performing U.S. REIT ETFs: June 2022
|symbol||ETF mention||Year-to-date restitution %||Expense ratio|
|KBWY||Invesco KBW Premium Yield Equity REIT ETF||-8.1 %||0.35 %|
|RDOG||ALPS REIT Dividend Dogs ETF||-12.6 %||0.35 %|
|SCHH||Schwab U.S. REIT ETF||-14 %||0.07 %|
|NURE||Nuveen Short-Term REIT ETF||-14.6 %||0.35 %|
|ICF||iShares Cohen & Steers REIT ETF||-15.1 %||0.33 %|
All data current as of June 8, 2022. Sources : Nariet, Morningstar and ETF.com.
REITs’ average return
Nareit notes that during the 20-year period ending December 2019, the FTSE NAREIT All Equity REITs index — which collects data on all publicly traded fairness REITs — outperformed the Russell 1000, a stock market index of large-capitalization stocks. The REIT index investments showed full returns of 11.6 % annually versus the Russell 1000 ’ s 6.29 %.
REITs: The pros and cons
There are advantages to investing in REITs, particularly those that are publicly traded :
- firm dividends : Because REITs are required to pay 90 % of their annual income as stockholder dividends, they systematically offer some of the highest dividend yields in the store market. That makes them a front-runner among investors looking for a regular stream of income. The most reliable REITs have a track record of paying bombastic and growing dividends for decades .
- senior high school returns : As noted above, returns from REITs can outperform equity indexes, which is another reason they are an attractive choice for portfolio diversification .
- liquidity : Publicly traded REITs are far easier to buy and sell than the arduous action of actually buying, managing and selling commercial properties .
- Lower excitability : REITs tend to be less explosive than traditional stocks, in depart because of their larger dividends. REITs can act as a hedge against the stomach-churning ups and downs of other asset classes, but no investment is immune to volatility .
- Illiquid ( particularly non-traded and private REITs ) : publicly traded REITs are easier to buy and sell than actual properties, but as noted above, non-traded REITs and private REITs can be a different history. These REITs must be held for years to realize electric potential gains .
- heavy debt : Another consequence of their legal status is that REITs have a draw of debt. They ’ re normally among the most indebted companies in the commercialize. however, investors have become comfortable with this situation because REITs typically have long-run contracts that generate even cash menstruate — such as leases, which see to it that money will be coming in — to comfortably support their debt payments and ensure that dividends will still be paid out .
- depleted growth and capital appreciation : Since REITs pay so much of their profits as dividends, to grow, they have to raise cash by issuing new stock shares and bonds. But investors are not always will to buy them, such as during a fiscal crisis or recession. So REITs may not be able to buy real estate of the realm precisely when they want to — but when investors are again will to buy stock and bonds in the REIT, the REIT can grow again .
- Tax charge : While REITs pay no taxes, their investors still must shell out for any dividends they receive, unless these are collected in a tax-advantaged account. ( That ’ s one reason REITs can be a great suit for IRAs. )
- Non-traded REITs can be expensive : The price for initial investment in a non-traded REIT may be $ 25,000 or more and may be limited to accredit investors. Non-traded REITs besides may have higher fees than publicly traded REITs .
Investing in REITs: Get started
Getting started is vitamin a elementary as opening a brokerage account, which normally takes good a few minutes. then you ’ ll be able to buy and sell REITs barely as you would any early sprout. Because REITs give such large dividends, it can be smart to keep them inside a tax-advantaged report like an IRA, so you defer on the distributions.
If you don ’ thymine want to trade individual REIT stocks, it can make a set of smell to just buy an exchange traded fund or reciprocal fund that vets and invests in a range of REITs for you. You get immediate diversification and lower risk. many brokerages offer these funds, and investing in them requires less legwork than researching person REITs for investment. early NerdWallet writer Jim Royal contributed to this article. disclosure : The author held no positions in the aforesaid investments at the master meter of publication .