How to Choose a REIT to Invest In
Real estate prices continue to soar, and the market is thriving. With that in mind, you might want to invest in real estate, but you might not have the disposable income to go about doing so in the traditional way. That doesn’t mean you’re left out.
A real estate investment trust or REIT is a good way to invest in real estate and diversify your portfolio, but you don’t need a huge amount of capital upfront to do so. Plus, a REIT tends to be lower-risk than other types of real estate investments.
What is a REIT?
A real estate investment trust is an investment vehicle where investors pool their money to invest in different types of real estate. Like traditional stocks or mutual funds, investors receive shares. That means as a REIT shareholder, you have a proportional interest in the income that is distributed by the investment trust and the assets under its ownership.
Basically, the REIT is a company that owns, finances or operates real estate producing an income. The company collects rent from its tenants, for example, and then that income is passed onto investors.
These are publicly traded companies that exist to provide exposure to real estate for investors.
A REIT is very similar to an exchange-traded fund (ETF). There’s diversification in the real estate assets, whether that’s in the form of loans or direct equity investments. It’s actively managed by real estate investment managers.
Choose Between One of Two Types
When you’re comparing REITs, there are two very broad categories to be aware of.
There are equity REITs and mortgage REITs. Most are equity.
An equity REIT is one that owns or potentially operates real estate that produces income, like commercial property and apartment buildings. An equity REIT will usually invest in one type of property. For example, it might invest in single-family homes or shopping centers.
When a REIT is investing in a mix of types of property, it’s a diversified REIT.
There are some factors to keep in mind if you’re an investor looking at a REIT.
First, you’ll want to identify the level of risk.
You’ll have to gain at least a basic understanding of the quality of tenants, lease lengths, business strategy, and how income comes in.
Another area you’ll want to understand to make a true comparison is the sector. There are REITs in the residential, retail, health care, infrastructure, and office sectors, just to give a few examples.
All REITs are properties that produce income, but there are going to be specific risks that are relevant to a particular sector.
A third consideration is the dividend yield. When you invest in a REIT, there is income that comes from property appreciation and also dividend payouts. The dividend yield on a REIT is often higher than on dividend stocks.
Some of the other factors that you need to assess when picking a REIT include:
• Management: You want to learn more about the manager’s history. The profitability and appreciation of included assets are going to heavily depend on the manager’s ability to choose the best investments and strategies.
• Diversification: Diversification can mean that if something happens to one sector of real estate, your REIT is balanced enough that you’ll be somewhat protected.
• Earnings: A third factor to use as a basis of comparison for a REIT is earnings. This gives you an overview of the performance, which then helps you understand how much money investors are getting and likely to get in the future.
Investing in real estate can be lucrative but also risky and expensive. A REIT offers an alternative to retail investors, regardless of income, but you should do some research to choose the best one for you.