Welcome to Herconomist, where we empower women like you to step into the world of finance with confidence. Our aim is to break down the complexities of investing and present them in a language that is more relatable, approachable, and empowering. Today, we’re shining a spotlight on one of the most accessible and lucrative investment avenues: Real Estate Investment Trusts (REITs).
What are REITs?
A REIT, or Real Estate Investment Trust, is a company that owns, operates, or finances income-generating real estate. Modelled after mutual funds, REITs pool the capital of numerous investors, enabling you to earn dividends from real estate investments without having to buy, manage, or finance any properties yourself.
Why Invest in REITs?
Investing in REITs offers several benefits. They generate a steady income stream, provide potential for long-term capital appreciation, and offer excellent portfolio diversification. The comparatively low correlation with other assets makes them an excellent portfolio diversifier, helping to reduce overall portfolio risk and increase returns.
Real Estate Investment Trusts (REITs) offer an average annual return of around 10-12%, depending on the specific REIT and market conditions. This return comes from a combination of rental income (usually distributed as dividends) and appreciation in the value of the properties owned by the REIT. While the returns on REITs may be comparatively lower than traditional real estate investments, they offer a unique opportunity for investors, especially those looking to dip their toes into the real estate market. This article will delve into the reasons behind the lower returns and the potential benefits of investing in REITs.
Types of REITs
REITs are classified into three broad categories, depending on their investment holdings. These include:
- Equity REITs: These REITs own and operate income-producing real estate. The revenues are primarily generated through rents.
- Mortgage REITs (mREITs): These REITs provide financing for income-producing real estate. They earn income from the interest on the mortgages and mortgage-backed securities they hold.
- Hybrid REITs: These REITs combine the investment strategies of both equity and mortgage REITs, owning and operating real estate properties, and holding commercial property mortgages in their portfolio.
Each REIT type comes with different characteristics and risks, so it’s crucial to understand what’s under the hood before you invest.
How to Invest in REITs
Here are a few methods to begin your investment journey in REITs today:
- Online Investment Platforms: Websites like Fundrise, RealtyMogul, and DiversyFund allow you to invest directly in a portfolio of REITs.
- Stock Brokers: Traditional brokerages like Charles Schwab, Fidelity, E*TRADE, and TD Ameritrade allow you to buy individual REIT stocks, REIT mutual funds, and REIT ETFs.
- Robo-Advisors: Automated investment services like Betterment, Wealthfront, and SoFi Invest include REITs in their diversified portfolios.
- Direct Investment: Some REITs allow you to buy shares directly from them, bypassing brokerage firms. For instance, Realty Income has a direct stock purchase plan.
- REIT ETFs and Mutual Funds: Fund providers like Vanguard, iShares, and Schwab offer REIT ETFs and mutual funds.
- Crowdfunding Platforms: For accredited investors, platforms like CrowdStreet, ArborCrowd, and RealCrowd offer high-value commercial real estate investments.
Remember to do thorough research and consider consulting with a financial advisor before making any investment decisions. REITs, like all investments, come with their own set of risks.
Benefits of Investing in REITs
REITs offer several benefits for investors. They typically provide a steady, regular income stream in the form of dividends, and potential for long-term capital appreciation. They offer excellent liquidity as most REITs are publicly traded on major stock exchanges, making buying and selling shares as easy as trading any other stock. Furthermore, REITs offer portfolio diversification benefits, helping to mitigate risk.
Risks of Investing in REITs
Like any investment, there are risks associated with investing in REITs. These include market volatility, interest rate risk, and property-specific risks such as tenant turnover and industry headwinds. It’s important to conduct thorough research and understand the potential risks before investing in REITs.
How Do REITs Work?
The primary way that REITs generate income is through the rents and leases of the properties they own. To qualify as a REIT, a company must adhere to specific IRS provisions, including investing at least 75% of total assets in real estate, deriving at least 75% of gross income from real estate, and returning a minimum of 90% of taxable income in the form of shareholder dividends each year.
Conclusion
Investing in REITs is an excellent way for women to build wealth and achieve financial stability. With the right knowledge and strategies, any woman can become a successful real estate investor. Remember, the key to successful investing is diversification, patience, and a clear understanding of your financial goals and risk tolerance. So, Join us at Herconomist and empower yourself to take control of your financial future!
FAQs
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
What I wish I knew before investing in REITs? ›
REITs must prioritize short-term income for investors
In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.
Can I invest $1000 in a REIT? ›
While they aren't listed on stock exchanges, non-traded REITs are required to register with the SEC and are subject to more oversight than private REITs. According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
Are REITs a bad investment? ›
In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments.
How does a REIT lose money? ›
Interest Rate Risk
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
What is bad income for REITs? ›
This is known as the geographic market test. Section 856 (d)(2) (C) excludes impermissible tenant service income (ITSI) from the definition of rent from real property, making it “bad income” for the 75% and 95% REIT gross income tests.
How do you make money on a REIT? ›
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
Is it better to invest in REITs or real property? ›
Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.
How to invest in REITs for beginners? ›
How do I Invest in a REIT? An individual may buy shares in a REIT, which is listed on major stock exchanges, just like any other public stock. Investors may also purchase shares in a REIT mutual fund or exchange-traded fund (ETF).
Do you get monthly income from REITs? ›
For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields of 6% or more.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
What is the average return on a real estate investment trust? ›
Over a 15-year period, according to Cohen & Steers, actively managed REIT investors realized an annualized 10.6% return. Of the other active strategies, opportunistic real estate funds placed second, at 9.8%. Core and value-added funds had average annualized returns of 6.5% and 5.6%, respectively, over 15 years.
Do REITs go down in a recession? ›
REITs historically perform well during and after recessions | Pensions & Investments.
What happens to REITs when interest rates go down? ›
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
How to pick a good REIT? ›
When you're ready to invest in a REIT, look for growth in earnings, which stems from higher revenues (higher occupancy rates and increasing rents), lower costs, and new business opportunities. It's also imperative that you research the management team that oversees the REIT's properties.
Why do REITs have to pay 90%? ›
To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.
What is the 75 75 90 rule for REITs? ›
Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.
What is the 80 20 rule for REITs? ›
In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.
What is the 30% rule for REITs? ›
30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.
