If you’ve been curious about investing in commercial real estate but are feeling disinclined by the headlines about declining office spaces, it’s time to take a closer look. The commercial real estate market has evolved, and new opportunities have emerged.
With publicly traded Real Estate Investment Trusts (REITs), you can tap into the income-generating power of the real estate market while keeping your investments flexible and diversified.
Today’s REITs are investing in everything from data centers to biotech labs. We’ll show you why that matters for your portfolio.
Getting Started With REITs
What are REITs?
REITs (Real Estate Investment Trusts) are companies that own, operate, or finance income-generating commercial real estate, offering investors a way to earn dividends from property investments without directly owning the properties themselves.
How do REITs work?
REITs generate income by owning, operating, or financing real estate properties, then distribute 90% of that income to shareholders as dividends.
How do I invest in REITs?
Like most other listed investments, individual shares of REITs can be purchased through your broker or investment advisor.
What Are REITs & How Do They Work?
Real Estate Investment Trusts, or REITs, are companies that own, operate, or finance commercial properties that generate income. You can invest in a variety of properties by buying shares of REITs which are traded on major stock exchanges just like any other stock. REITs give you access to the commercial real estate market without having to purchase and manage properties yourself.
REITs are required to pay out at least 90% of their taxable income to shareholders as dividends. That makes them a great vehicle to hedge against inflation and diversify your portfolio.
What Are the Types of REITs?
There are several types of REITs offering varied opportunities to match your investment strategy. Understanding these types can help you choose the best fit for you.
- Equity REITs are the most common. They own and manage income-producing properties like office buildings, shopping centers, and apartments. Revenue primarily comes from leasing space and collecting rent from tenants, which is then distributed to investors as dividends.
- Mortgage REITs (mREITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities. They are more sensitive to interest rate fluctuations because the primary source of their income is the interest on the assets.
- Public non-listed REITs (PNLRs) are registered with the SEC and offer shares to the public, but they don’t trade on major stock exchanges. They often have lower liquidity and may come with higher fees than listed REITs.
- Private REITs aren’t publicly traded or registered with the SEC. Typically, they’re only available to institutional investors or high-net-worth individuals. Private REITs offer potential tax benefits, but they are more risky and less transparent.
How Do REITs Make Money?
REITs generate income by owning and managing commercial real estate, such as office buildings, shopping centers, and apartments. The bulk of their revenue comes from rent paid on property leases.
REITs are obligated to distribute at least 90% of taxable income to shareholders as dividends. Some may enhance returns through profits from property sales or development projects. Either way, a substantial portion of the generated income goes directly to you.
Benefits of REITs: Why Invest In Real Estate Investment Trusts
Income Generation
REITs have a considerable ability to generate income. Since they are required to pass 90% of their taxable income to investors, you receive consistent dividend payments. This payment structure makes REITs an attractive option if you’re looking for investments that provide a regular income.
Diversification
You can reduce overall portfolio volatility by adding real estate to your mix of assets. Real estate often behaves differently from stocks and bonds, hedging against market downturns. REITs often track inflation. When property values increase, so does rental income, benefitting your purchasing power over time.
Accessibility
Investing in REITs is incredibly accessible. Unlike direct real estate investments, many REITs can be bought and sold on major stock exchanges without significant capital and management responsibilities. This lower barrier to entry makes it possible for a broader range of investors to gain exposure to the real estate market.
How To Invest In REITs
You can purchase individual shares of REITs through a broker or investment advisor, just like you would with most other investments. Many REITs are traded on major stock exchanges, which means you can easily buy and sell them within your investment account.
Final Thoughts
Investing in REITs offers a unique opportunity to tap into the real estate market without the challenges of direct property ownership. With the potential for consistent income through dividends, diversification benefits, and easy accessibility, REITs can be a valuable addition to a well-rounded investment portfolio.
As with any investment, it’s important to consider how REITs fit into your overall financial plan. Consulting with a financial advisor can help you determine whether REITs align with your risk tolerance, financial goals, and long-term strategy. With the right approach, REITs can play a significant role in building a resilient and diversified portfolio.
The financial advisors at SK Wealth are committed to empowering you through informed decision-making in all facets of your financial picture. Our financial planning process, The Integrated Financial Advantage™, has been crafted and honed over the past 25 years to ensure our clients receive personalized recommendations that allow them to live with intention, tomorrow and today.
