Real Estate Investment Trusts (REITs) (2024)

FAQs

Real Estate Investment Trusts (REITs)? ›

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Since they aren't publicly available and don't register with the SEC, it's difficult to pinpoint specific investment minimums. However, investment firm Edward Jones says minimum investments for private REITs can range from $1,000 to $50,000.

Does Warren Buffett invest in REITs? The short answer is yes. Berkshire Hathaway does allocate capital real estate ownership throughout REITs. Learn Warren Buffett REIT investments below.

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account. This substantial amount is due to savings accounts' relatively low return rate.

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.

REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

Can I sell my REIT anytime? ›

Potential advantages of publicly traded REITs

(Learn more about fractional shares with Fidelity.) That's much more achievable for many investors than buying an entire property. Access to cash if you need it: Investors can buy and sell publicly traded REITs whenever markets are open.

Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. 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.

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.

“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% of its taxable income to shareholders annually in the form of dividends.”

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.

A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

U.S. REITs have delivered 19.5 percent average annualized monthly returns in periods when both growth and yields have declined.

The beauty of REITs for income investors is that they are required to distribute 90% of their taxable income to shareholders annually in the form of dividends. In return, REITs typically do not pay corporate taxes. As a result, many of the 200+ REITs we track offer high dividend yields of 5%+.

REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.

Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.