How to Invest in REITs for Beginners
If you’re looking to passively invest in real estate without any of the work involved in owning and running these investments, real estate investment trusts may be the way to go for you.
REITs are organizations that own and operate real estate assets, such as medical office buildings, triple net leases, and shopping centers. They are required by law to distribute a minimum of 90% of their taxable income to shareholders in the form of dividends, which can make for an attractive cash flow play as a passive investor.
They’re also traded much like stocks, bringing more liquidity than traditional real estate and a familiar investing process for investors.
Here are the steps you can take to start investing in REITs:
Decide on your investment objectives and risk tolerance
There are many, many different REITs out there.
In fact, there are more than 200 REITs traded on major stock exchanges and that doesn’t include the many private and non-traded REITs.
Real estate investment trusts typically offer a combination of cash flow and potential capital appreciation, but they also come with their own set of risks that you should be aware of.
Some REITs will diversify their portfolios across a wide variety of asset types, classes, locations or more. Others may simply focus on a single product type.
Not all REITs are created equal!
As a shareholder in a real estate investment trust, you’ll want to study and understand the pros and cons that each REIT can bring to the table to see if that aligns with your investment philosophy.
There are certainly some benefits to investing in a REIT that is solely focused on one asset class, as they’ll likely be one of if not the best investor in that space. However, you can see the potential downsides there if that asset class takes a hit, much like hotels or office space did during the pandemic.
Fortunately, because of the way REITs are structured and monitored, much of the information and history on their transactions can be found with a little research. They’re often far more transparent than private investments will be simply due to the way they have to report to the SEC.
So, do your research on potential investment opportunities before diving in.
2. Consider the management team
REITs are companies.
And just like any other company in any industry, they are often only as good as the people running them. It is paramount that research the management team of any REIT you are considering investing in and assess their experience and track record.
When a pandemic hits or another market disruptor comes along, it won’t matter how stable an asset was before - you never know how things will change. The right management team can make a bad investment good, while the wrong could make a great investment turn bad.
If possible, see if you can speak or even meet with the management team. It’s probably a longshot, considering how big some of these firms are, but they’ll often have an investor relations team that could provide you with further information.
NAREIT is an online organization that provides quite a bit of information, as well, about these organizations so be sure to check that out, too.
3. Look into The REIT’s Financials
REITs are required by law to disclose their financial performance and operations within their annual reports. You’d be amazed at the amount of information you can gather from these documents.
Review these reports, which can be sourced directly from the REIT or through a source like NAREIT, to get a sense of the group’s financial health.
Don’t just look at what their shares are trading at, though.
Dive into the numbers. Look into how much cash they have on-hand, the dividends they pay out per share, and how the value has trended over the last decade.
You should also study their investment philosophy - what determines if a project is a good buy or not? And, if possible, look at how they’ve structured debt on their deals.
4. As Always, Diversify Your Portfolio
With any investment, you should always aim to diversify your portfolio so that you can manage your downside risk. You may want to consider investing in a variety of REITs that acquire different types of real estate assets and operate in different geographic regions.
Investment philosophies are also important here. Each REIT will have its own approach to ESG, acquisitions, exit strategies, development, etc. that will change the way they operate these deals.
With hundreds of REITs out there, you’ll certainly have quite a few options no matter what your investment criteria is.
Are There Higher Paying Alternatives to REITs?
REITs are a wonderful way to diversify your investment portfolio, gain exposure to the real estate market, and generate income.
Before diving into any REIT investment, it’s best to educate yourself on how each REIT works, what their investment philosophy is, and what their financial position looks like.
While real estate investment trusts can be solid passive income streams, they’re not always the highest returning investments.
If you’re looking to find passive real estate investment opportunities that can bring you better returns than REITs, you should dive into commercial real estate syndications.
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