3 Things Investing Newbies Should Know About Real Estate Investment Trusts, or REITs
The current rental market is so hot that it makes me wish I had a rental property of my own to lease or list as an Airbnb. Then I think of the duties and responsibilities that come with being a landlord, and it’s a hard pass for me. As a homeowner, it’s irritating enough to deal with fixing my own toilet or sink from time to time, so I imagine it’d be a nightmare to get that panicked call from a tenant in the middle of the night.
While active real estate investing may not be my jam, I’m happy to say I’m still able to dabble in the real estate market thanks to my investments in real estate investment trusts (REITs — pronounced “reets”). I’m a real estate writer, not a financial advisor, but I think REITs are a great way to build a solid income-producing investment portfolio.
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What Are REITs?
REITs are companies that own and operate income-producing real estate in a variety of sectors, including office, retail, health care, warehouses, and hotels. For example, Simon Property Group (NYSE: SPG) is one of the largest retail REITs, owning most and operating most of the shopping malls and outlets in America.
You can buy and sell REIT shares through a brokerage — more on that in a bit — just like other stocks. However, you’ll want to hang on to them for the long term so you can benefit from the dividends. REITs are legally required to pay 90 percent of their taxable income to investors by way of quarterly payments based on the current value of the stock and the number of shares owned.
Office and retail space have taken a hit during the pandemic for sure, but there are other REIT sectors that have thrived. Data centers in particular can be a solid investment because companies will always need secure places to store their data servers. In fact, investment experts have touted data center REITs as recession-proof investments, because companies must sign long-term leases, which guarantees income for the data centers.
If you already have a retirement plan or work with a financial advisor, it’s worth a discussion to see how REITs might factor into your investment strategy. Here are three things to consider:
1. REITs make it easy to diversify your investments.
One of the hallmarks of a good investment portfolio is diversification. You don’t want to put all of your proverbial eggs in one basket when it comes to your money. With stocks, this would mean concentrating all of your investments in one industry or area, which is risky in case the entire sector gets impacted, as we’ve seen with office and retail space during the pandemic.
Here is a more expansive list of REIT sectors. If you were to buy even one share of a REIT in each of these sectors, you’d be well on your way to building a diverse portfolio:
- Lodging and Resorts
- Data centers
- Diversified (these REITs invest in a mix of everything)
- Specialty (unique properties that don’t fall into the other categories, such as casinos and amusement parks)
It’s important to do your research so you know at least a little bit about the industry and the company. Nareit is a good resource for learning more about the various REIT sectors.
2. You can make money in two different ways.
The quarterly dividends are why most people get into REITs in the first place. Granted, with my modest holdings — I’ve made some small investments in self-storage, healthcare, and data center REITs — I’m not exactly raking it in right now. But I hope to grow those holdings over the years and decades, and one fine day my REIT investments will offer me a nice, passive income stream.
Of course, if I decide to sell my REIT shares, that’s the other way I can make money. By holding REITs for the long term — at least five years and preferably much longer — they’ll increase in value. When I am ready to retire, I can sell off my REIT shares at a tidy profit.
The best part? I’ll be making this money without collecting rent from tenants, paying maintenance costs, or dealing with any of the other many headaches that come along with being a landlord.
3. You can save on taxes with the right investment account.
Technically, you can open up any brokerage account and start buying REITs, just as you would with any other type of stock. But you’ll want to add yours to a Roth IRA (individual retirement account) so you can take advantage of the tax benefits.
Traditional IRAs take your pre-tax dollars, so you’ll be taxed when cashing in later. The Roth, however, allows you to withdraw them tax-free during retirement. That is still decades away for me, but I know my silver-haired future self will thank my smart young(ish) current self for choosing wisely.
Are REITs right for you?
Investing in the stock market is not a get-rich-quick scheme; it is a long-term game. There are some harrowing headlines about the economy lately that likely have you worried. Me too. But I haven’t dumped any stock. In fact, I’m continuing to “buy the dip,” as the cool kids like to say — buying shares as they go low to hopefully catch them on the rebound — and I’ve been adding more REITs to my Roth IRA account. If you’re looking to get started in investing or diversify your current investment strategy, REITs are worth considering.
All financial investments carry some level of risk. The information presented here is for educational purposes and should not be taken as financial advice. Connect with a financial advisor to discuss your own risk tolerance.