How to Invest in REITs

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REITs offer investors a simple and accessible way to put their money into the real estate market without becoming a landlord or investing tens of thousands of dollars at once. Thankfully, buying REITs is just as easy as buying stocks. We’ll go over how to buy REITs, some of the REIT fees you might pay and the pros and cons you’ll need to consider before you buy.

Investing in REITs Step by Step

Investing in REITs is just as easy as investing in the stock market. Let’s take a look at how you can start your investment journey today. 

Step 1: Research REITs

You shouldn’t invest in the first REIT you see on your trading app. Research REITs that buy property in the area you’re most interested in. Compare sectors, price, dividend data, dividend yield and analysts ratings before you decide which REIT to buy. Remember that if you buy a non-publicly traded REIT, you might need to pay REIT fees to the management team. There are also several types of REITs to consider:

Equity REITs

An equity REIT is the most common type of REIT and operates by purchasing properties and renting or leasing them to third parties. The REIT is responsible for maintaining and managing these properties. If you see the phrase “REIT” listed anywhere, the writer is typically referring to an equity REIT unless otherwise specified.

Mortgage REITs

Mortgage REITs operate by issuing funding for mortgages to income-producing properties. They then collect and pay out dividends originating from the interest these mortgages generate.

Private REITs

Private REITs are not listed on public exchanges and are exempt from SEC registration. You’ll need special access to invest in this type of REIT.

Some Private REITs we consider excellent include:

Step 2: Place an Order Through Your Broker

Buying publicly-traded REITs is just like buying a share of stock. Log into your brokerage account, search for the REIT you want to buy by symbol and place a buy order. When someone is selling a share of the REIT you want at the price you’ve specified, you’ll see it in your account. Never purchased a share of stock before? Before you buy your first stock, you’ll need to open a brokerage account. Luckily, it’s never been easier to open a brokerage account online. Here are some of our favorite brokers:

Step 3: Monitor Your Investment

Just like any other stock, your REIT will rise and fall in value. You can monitor your progress and portfolio growth on your brokerage account. When you receive a dividend, you’ll see it as a pending deposit in your account. 

What is a REIT Exactly?

For those who know the term but don’t know what a REIT really is, a real estate investment trust (REIT) is a company that owns, maintains and manages income-producing properties. Most REITs operate in a very simple way: they use your money to purchase commercial or residential space, rent that space out to tenants and distribute the income to shareholders. There are different types of REITs, and individual REITs may choose to specialize in certain markets. For example, Universal Health Realty (UHT) is a REIT that leases medical facilities, while Simon Property Group (SPG) is a REIT that leases commercial shopping spaces. 

If you own shares of a REIT, you’ll usually receive your money in the form of a dividend. A dividend is a portion of profits that the company pays out to shareholders. Each share of stock in a REIT entitles you to a particular dividend based on the company’s income. For example, if you own 1,000 shares of a REIT that pays out 50 cents in a dividend each quarter, you’ll receive a total of $500 per business quarter. Most REITs pay out dividends every quarter, but some pay out annually or monthly. You’ll see your dividends in your brokerage account as they’re issued. 

REITs are unique because they’re one of the only types of companies required to pay dividends to its shareholders. Under most corporate classifications, a company can decide when and if it will pay dividends. However, to maintain its classification as a REIT, a company is legally required to pay out at least 90% of its taxable income to shareholders in the form of dividends.

Most REITs aim for 95% or even 100% total payouts. This can make REITs an excellent choice for long-term investors who want to build a passive income stream.  ow much do REITs pay in dividends? The answer will depend on the specific REIT that you invest in. You can use the SEC’s EDGAR database to research companies before you invest in them. 

What Are The Pros and Cons of Investing in REITs?

Let’s take a look at a few of the pros and cons that come with investing in REITs. 

Pros Cons
Higher dividends: REITs are required by law to pay out at least 90% of their taxable income in dividends. This means more profit for you as the shareholder.

Easy purchase process: Interested in investing in real estate but don’t have the time, down payment or credit score to buy a rental property? REITs give you an easier way to invest. 

Access to more types of property investment: Unless you have a few hundred thousand dollars lying around, you can’t invest in a commercial property or a medical care facility on your own. REITs pool your funds together with other investors, allowing you to invest in more types of properties.

Higher taxes: REITs usually pay out higher dividends than competing stocks. While this can be great for your wallet in the short-term, REIT dividends aren’t taxed at the lower qualified dividend rate that most stock dividends are. This means you’ll need to put away more money for taxes. 

Long-term investments: If you’re looking for a way to mask fast cash, REITs might not be for you. It can take years to recoup your investment through dividends, even if your REIT of choice is relatively affordable. 

Investing The Right Way

It’s important to remember that the dividends you earn from your investment in a REIT are taxable income. When you receive a dividend, you’ll want to set aside a percentage of your earnings for future tax considerations. Keeping careful records of received payments can help you avoid fraud and accidental financial malfeasance.