Real estate has long been one of the most attractive ways to build wealth. But for many people, buying and managing property directly is expensive, time-consuming, and risky. This is where REITs come in. A Real Estate Investment Trust, or REIT, gives everyday investors access to income-producing real estate without having to purchase property themselves.
How REITs Work
A REIT is a company that owns, operates, or finances real estate across a variety of sectors such as apartment buildings, shopping centers, office towers, warehouses, data centers, and even cell towers. Instead of buying an apartment complex or office building on your own, you can buy shares in a REIT and gain exposure to the rental income and potential property appreciation.
By law, REITs must meet specific requirements to qualify for their tax advantages. The most important rule is that a REIT must pay out at least 90% of its taxable income to shareholders in the form of dividends. This makes them a popular choice for income-focused investors.
Types of REITs
There are several categories of REITs:
- Equity REITs – These own and operate real estate. They generate income primarily through rent from tenants.
- Mortgage REITs (mREITs) – These provide financing for real estate by purchasing or originating mortgages. They earn money from the interest on these loans.
- Hybrid REITs – These combine elements of both equity and mortgage REITs.
Most individual investors put their money into publicly traded equity REITs because they are easy to buy and sell through the stock market, much like shares of any other company.
Benefits of Investing in REITs
There are several reasons investors consider REITs as part of their portfolio:
- Diversification – Real estate often moves differently than stocks or bonds, offering balance to an investment portfolio.
- Dividend Income – Since REITs are required to distribute most of their income, they typically offer higher dividend yields than many other stocks.
- Accessibility – Buying shares in a REIT is far less expensive and more liquid than purchasing physical property.
- Professional Management – REITs are managed by professionals who handle property acquisition, maintenance, and leasing.
Risks of REITs
As with any investment, there are downsides to consider:
- Interest Rate Sensitivity – REITs can be negatively affected by rising interest rates, which make borrowing more expensive and can reduce demand for dividend-paying assets.
- Market Volatility – Publicly traded REITs fluctuate in price like stocks, so their value can change quickly.
- Sector Risks – Different REITs focus on specific areas of real estate. For example, retail REITs may struggle if brick-and-mortar stores close, while office REITs face challenges if remote work trends persist.
How to Invest in REITs
Investors have several ways to add REIT exposure to their portfolio:
- Purchase shares of publicly traded REITs through a brokerage account.
- Invest in REIT mutual funds or exchange-traded funds (ETFs) for built-in diversification.
- Explore private or non-traded REITs, though these are less liquid and often more complex.
Should You Invest in REITs?
REITs can be a valuable tool for investors who want regular income, portfolio diversification, and exposure to real estate without owning property directly.
REITs fit especially well for people who are building a balanced long-term portfolio alongside index funds like the S&P 500, short-term treasury bills, and a high-yield savings account.
As always, it is worth considering your risk tolerance and speaking with a financial advisor before making investment decisions.
Winchell House 