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Should You Add a REIT To Your Investment Portfolio?

real estate invesment

A lot of people want to invest in real estate, but they’re not ready to flip properties or be a landlord. There are other ways to invest in real estate without having the responsibility of holding physical property. One way is a Real Estate Investment Trust or REIT.

The purpose of a REIT is to help individuals invest in income-producing real estate. A REIT will own and usually operate real estate or related assets. These are large-scale real estate assets, typically such as apartments, hotels, and commercial space.

The REIT isn’t a developer who aims to resell. Instead, they buy and develop properties to operate them as part of their portfolio.

Again, one of the big benefits of a REIT is that as an individual retailer investor, you can own a share of real estate income without going and buying commercial real estate.

How to Invest in REITs

There are a few different ways to invest in REITs. In general, you buy shares listed on stock exchanges. You can also purchase shares in a REIT ETF or mutual fund. An estimated 87 million Americans invest in REITS through their financial funds and retirement.

The price of REIT shares fluctuates throughout the trading day, like companies with publicly-traded stocks.

The four types of REITs are:

  • Equity REITs: Most REITs that are publicly-traded are equity REITs. Equity REITs own or operate real estate that produces income.
  • mREITs: These are also called mortgage REITs, and they produce income by having mortgages or originating them and mortgage-backed securities.
  • Public non-listed REITs: These are SEC-registered REITs that don’t trade on the national stock exchange.
  • Private REITs: These are SEC registration-exempt and don’t trade on the national stock exchange. Usually, they’re only available to institutional investors.

If you want to buy shares of a REIT listed on a major stock exchange, the process is the same as buying shares of another public company. If you buy an ETF or mutual fund, you may find more liquidity than buying traditional shares.

Buying private REITs is more complex, with them being limited to accredited and institutional investors.

What Are the Pros and Cons of Investing in REITs?

Some of the benefits of adding a REIT to your portfolio include:

• The biggest advantage is exposure to real estate. You don’t have to acquire properties directly, and you can still take advantage of the upside of the real estate market. Owning real estate directly can be lucrative but also risky and time-consuming.
• REIT companies must payout at least 90% of their taxable income to their shareholders, so they’re a good option for dividends. You could use REITs as a source of income.
• There’s diversification with REITs. Real estate is an asset class that isn’t directly linked to the markets in the traditional sense, so if markets go down, having REITs in your portfolio can shield you from the downside.

The downsides of REITs include:

• The dividends earned on REITs are usually taxed at a higher rate than the dividends of traditional stocks.
• There’s a high level of risk and volatility that comes with REIT investment, even though they don’t always follow the market. There can be big swings in the real estate market and the economic market in general that have a massive impact on the volatility of REITs.

Whether or not to invest in a REIT depends on a few factors. First, how risk-averse or tolerant are you? Second, are you interested in adding something to your portfolio that tracks the real estate market? Is this a better option for you than a traditional real estate investment?

They’re all things to ask yourself about REITs, which do have the advantage of being income producers.