How To Invest In REITs

How do you invest in REITs?

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

CompareBanks is reader-supported. When you click through some links on our site, we may earn an affiliate commission. Learn more

Real estate investment trusts (REITs) are an increasingly popular and lucrative investing choice, offering investors of all levels an opportunity to build long-term wealth in the real estate market. But how exactly do they work, and how do you invest in REITs?

In this article, you'll learn the basics of investing in REITs, from the various types available to the numerous ways to invest in them.

With the right knowledge, you can start investing in REITs with confidence and get closer to achieving your financial dreams.

Unlocking the Potential of Real Estate Investment Trusts

What are REITs?

REITs are an investment vehicle that allow investors to put their money into real estate without actually buying properties. They're publicly traded companies that own, operate, and manage real estate portfolios.

They act like any other publicly traded company, issuing shares investors can buy and then earning revenue through the properties they own.

REITs have become popular with investors because they provide easy access to real estate investments without the hassles of a property rental business. Unlike a direct purchase of real estate, which requires financing and managing tenants, investors can purchase REIT shares and hold onto them without additional involvement.

Additionally, REITs allow investors to diversify their portfolios without having to buy multiple properties or have the money or expertise to manage them.

How Do REITs Work?

REITs operate much like any other company: They invest in properties, such as apartment buildings, hotels, shopping centres, office buildings, and warehouses, and manage them for investors. They earn rental income and management fees from the tenants that use their properties.

In addition, REITs may develop and construct new properties, often with the help of third-party developers and contractors.

When investors purchase shares of a REIT, they become part owners of the real estate portfolio the REIT owns. Afterwards, they pay out the income they generate to their shareholders in the form of regular distributions. These distributions are generally in the form of dividends and are paid out on a quarterly basis.

Furthermore, most REITs offer investors the opportunity to gain or lose capital through the sale of the REIT’s shares on the stock market.

The key benefit of investing in a REIT is the opportunity to access long-term appreciation of the property portfolio, as well as the cash flow generated by rental income and management fees. As long as the REIT pays out dividends and the underlying value of the property portfolio appreciates, investors can enjoy higher returns than those of other investments.

REITs are an effective way for investors to gain access to real estate investments without the time and hassle of property ownership, and can offer an opportunity for diversification and a steady stream of income. Ultimately, REITs remain an attractive option for investors looking to add real estate to their portfolios.

What are the Different Types of REITs?

Real estate investing is a popular option for many investors, but it can be intimidating due to the complexity of the asset class. Fortunately, a type of real estate investment trust (REIT) can help simplify some of the investment process.

Let’s take a closer look at the different types of REITs and how they work.

Equity REITs

Equity REITs pool together funds from multiple investors and use them to purchase and manage income-generating real estate. They're also required to pay out at least 90 percent of their income as dividends so they can provide investors with regular income streams. By law these companies must do this to actually qualify as a REIT.

Mortgage REITs

Mortgage REITs, as the name implies, focus on investments in mortgage loans. They're not required to own real estate, but instead purchase and manage mortgage loans that produce income through interest payments. These loans are typically used to finance real estate transactions.

Hybrid REITs

Hybrid REITs combine aspects of both equity REITs and mortgage REITs and allow investors to gain exposure to both real estate and mortgages. Hybrid REITs may own multiple types of real estate and hold mortgages as investments. Hybrid REITs typically focus on residential real estate, such as apartments and single-family homes.

International REITs

One of the primary advantages of investing in international real estate investment trusts is the potential to earn higher returns than those available from domestic investments. Foreign markets can provide higher rates of return as a result of rising rental prices, foreign currency exchange rates, and higher growth potential.

Additionally, these trusts can provide exposure to a variety of foreign countries and geographic locations, which can help to reduce risk and ensure a more consistent stream of income.

Another advantage of investing in international REITs is that they can provide a convenient way to access global real estate markets. These trusts allow investors to gain access to properties located in countries where they may not be able to buy or sell directly. What's more is they may offer access to markets with favourable taxation rules, which can provide a tax-efficient approach to investing.

Whatever form of REIT you choose, it’s important to understand how the different types work and how they could fit into your overall investment strategy. REITs provide diversification and a reliable income stream, but they can also be fairly risky if the underlying investments don’t perform as expected.

As with any investment, it’s paramount to do your research and understand the risks before investing.

How to Invest REITs

Whether you are a novice investor or experienced real estate investor, REITs provide investors with the potential to diversify their portfolios and use the power of leverage to gain exposure to the real estate asset class.

Here are the 6 main ways to invest in and trade REITs:

1. Directly Through Publicly Traded REITs

You can purchase shares of any publicly-traded REIT on any major stock exchange, similarly to any other stock. Investing in a REIT this way allows for easy diversification, as you can buy a variety of different REITs to form a solid portfolio.

The downside is that it may be difficult to find the right REITs to invest in, and you may have more taxable income due to the double taxation of REITs.

2. Indirectly Through ETFs and Mutual Funds

If you’re not interested in researching and choosing individual REITs to invest in, you can purchase an exchange-traded fund (ETF) or mutual fund that invests in a variety of different REITs. This is a more passive way to invest in REIT companies, and is perfect for beginners.

While these funds may offer more diversification, they also come with management fees and may be subject to capital gains taxes.

3. Through Real Estate Investment Groups

Real estate investment groups (REIGs) are collectives of individuals who get together and pool their money to buy real estate properties. They may be investing in a single property or diversifying by investing in a few different properties.

This type of investment provides a hands-on approach, and you’ll be able to directly influence the selection, management, and repurchase of the properties.

4. Through Real Estate Investment Funds

Real estate investment funds (REIFs) are like focused mutual funds that specialise in a particular sector of the real estate market. They provide a more diversified approach since they can invest in multiple properties in different locations.

They are popular among institutional investors who want to enter the real estate world but don't want the risk of actively managing a portfolio.

5. Through Real Estate Investment Trusts

REITs are publicly-traded companies that specialise in owning and operating income-producing real estate. REITs allow investors to gain exposure to professionally managed real estate portfolios with the potential to earn dividends and appreciate in value.

REITs come in many different flavours, and investors should research each individual REIT before investing to see if it fits their goals and risk profile.

6. Through Private Placements

Private placements allow investors to invest directly in real estate investments, such as new developments, renovations, and/or repurchasing existing commercial and residential real estate.

They typically require a large minimum investment, but you can often invest in higher quality investments and negotiate favourable terms with the owner.

With the 6 main ways to invest, it's important to do your research and consider the pros and cons of each option before investing.

How to Find the Right REIT Investments

Are you looking to invest in a REIT? With low-interest rates, now could be an ideal time to invest in real estate, but it can be difficult to know which REITs are the best fit for your portfolio.

By doing your due diligence and considering different types of REITs, you can make an informed decision that is right for you.

Here are some tips to help you find the right REIT investments for your portfolio.

1. Research the Different Types of REITs

First, research the different types of REITs, so that you understand what each of them can offer you. As previously discussed, there are four major types of REITs—equity REITs, mortgage REITs, hybrid REITs and international REITs.

Equity REITs own and manage rental properties, while mortgage REITs lend capital to developers in real estate.

Hybrid REITs combine both investments, and international REITs can provide exposure to different foreign markets. Knowing the different types will help you determine which REITs fit your investment goals.

2. Know Your Risk Tolerance

In addition to researching the different types of REITs, you should also consider your risk tolerance. REITs can be risky investments, so it’s important to think about how much risk you’re willing to take.

Factors such as the volatility of the market, the strength of the REIT’s balance sheet and the management team’s performance can all influence the investment’s success.

3. Consider Yield and Dividends

When selecting a REIT, it’s important to consider the yield and dividend structure. REITs usually pay dividends, however, the yield and the timing of payments can vary across different REITs. It’s important to thoroughly research the yield and dividend structure of the REIT you’re interested in to make sure it meets your return expectations.

4. Look for Long-Term Growth Potential

Finally, when investing in a REIT you should look for investments with long-term growth potential. You should evaluate the REIT’s growth prospects and track record to determine if it’s a viable long-term investment. In addition, you should also look at the REIT’s debt-to-equity ratio to ensure that it’s not over-leveraged.

What You Need to Know Before Investing in REITs

Real Estate Investment Trusts provide investors with a way to gain exposure to real estate investments without owning the physical property. Although REITs can be lucrative investments, there are important considerations which investors should be aware of prior to investing in this asset class.

To help investors better understand REITs, here are a couple things to keep in mind before investing in REITs.

Carefully Consider the Fees Involved in Investing in REITs

In addition to understanding the different types of REITs, it is also important for investors to consider the fees associated with investing in REITs.

Investors should not only look at the fund's fee structure, but also the fees associated with purchasing and selling shares. All of these fees can add up quickly, so investors should research different funds to find the one that offers the most cost-efficient solution.

Understand the Investment Strategy

Lastly, before investing in REITs, investors should also understand the fund's investment strategy. Different funds have different investment strategies, so investors should carefully consider which REITs are most suitable for their own investment goals.

For example, some REITs may focus more on commercial properties, while others focus on residential real estate. Similarly, some funds may specialise in a certain geographic region, while others may invest in real estate worldwide.

By understanding the investment strategy of the fund, investors can ensure they are making a sound investment in the right REITs.

Related Guides:

Related Articles

How to Invest in the S&P 500
The S&P 500 is a powerful barometer for the state of the US economy. It brings...
What Are Socially Responsible Investments?
If we're being honest with ourselves as investors, how morally reprehensible the...
What Are Municipal Bonds?
Whether you're new to investing or a seasoned pro, it helps to know what kinds of...
How to Invest in Whisky
Alternative investments such as whisky can a great way to diversify your portfolio....