Frank X Acocella, CounselPro Lending, on Real Estate REITs

Real estate investment trusts (REITs) are a way to invest in commercial real estate without having to locate, purchase, and manage commercial properties. REITs are an avenue to diversifying an investment portfolio that’s heavily weighted in stocks, bonds, or single-family residential properties. In addition to diversification, investors value REITs due to their potential for high yields and capital appreciation.

REITs Defined

REITs are commercial real estate portfolios that investors can buy shares of. Under federal law, REITs are regulated securities which must hold at least 75 percent of their assets in real estate and cash and are required to generate a minimum of 75 percent of its income from real estate. REITs can be divided into three primary types. They are equity REITs that own and operate a portfolio of commercial properties, mortgage REITs which finance commercial properties, and hybrid REITs which finance and operate both equity and mortgage REITs.

Types of Specialty REITs

Diversified REITs own properties in various industries. However, specialty REITs operate in a niche market. Retail REITs specialize in shopping centers and freestanding retail. Office REITs collect rent from the tenants of the office buildings they own. Healthcare REITs invest in hospitals, skilled nursing facilities, medical office buildings, and senior housing. Residential REITs own and operate large apartment buildings and manufactured housing. Less common specialties are data center REITs, self-storage facility REITs, hotel REITs, and industrial (warehouses and distribution centers) REITs.

How Investors Make Money from REITs

REITs give investors two ways to make money. First, REITs tend to provide high dividends due to the federal law requires REITs to pay at least 90 percent of their taxable income to investors through dividends. The second way is the appreciation in the share price.

How to Purchase REITs

Many REITs are publicly traded on the stock exchange and shares may be purchased through a broker. An advantage of publicly traded REITs is they are liquid assets. Non-traded REITs have less liquidity and can be purchased from a participating broker or financial adviser. Non-traded REITs are characterized by high sales fees and lower returns than their publicly traded counterparts.

Investors aren’t limited to buying individual REITs. REIT exchange-traded funds are passively managed to follow a particular real estate index such as the Dow Jones U.S. REIT Index. Real estate mutual funds professionally manage their pooled assets to invest in REITs and other real estate companies. Unlike REITs, these mutual funds aren’t required to pay annual dividends.