A real estate investment trust (REIT) is a company that owns and runs a portfolio of income-generating real estate. REITs usually specialize in one particular sector of real estate, such as retail, residential, healthcare, or office blocks, although they can be a lot more diverse than those four groupings. A personal favorite of ours here at MyWallSt is American Tower (NYSE: AMT), which owns and operates cell towers across the world.
REITs were established in 1960 to allow smaller investors to purchase a stake in large real estate portfolios and they operate the same way as mutual funds. There are a number of different requirements companies must adhere to in order to qualify as a REIT, such as receiving at least 75% of its income from its real estate operations, but the most pertinent one for us investors is that REITs must return at least 90% of its taxable income to shareholders in the form of dividends. That’s the secret to these obscure types of securities: they’re an excellent dividend play.
How do I invest in a REIT?
There are a number of non-publicly traded REITs that can be accessed through retirement plans or specific brokers, but the most common way of investing in a REIT is through your broker, exactly like you would a stock. Most REITs are publicly traded entities and can be invested in as you would normally. There are also REIT mutual funds and ETFs available to the retail investor.
When conducting due diligence on a REIT, there are a few intricacies that investors must take into account. Ratios differ from traditional equities, with funds from operations (FFO) used instead of earnings per share (EPS) to measure cash flow. FFO is tallied by adding depreciation and amortization to earnings and subtracting gains on sales. This is an example of the fact that although it walks like a stock and talks like a stock, REITs are a different animal and should not be entered into without proper consideration and research.
Examples of REITs
- American Tower is a personal favorite of us here at MyWallSt, it owns and operates cell towers worldwide
- Vanguard Real Estate ETF (NYSEARCA: VNQ) offers an opportunity for investors to buy a diversified real estate holding. It also boasts an expense ratio of 0.12% making it a much cheaper option than some of the other REIT ETFs out there.
- Prologis (NYSE: PLD) concentrates on industrial distribution properties
- Realty Income Corp (NYSE: O) is a real estate investment trust that specializes in retail and pays a monthly dividend
- Liberty Property Trust (NYSE: LPT) portfolio consists of primarily office and industrial properties
- Digital Realty Trust (NYSE:DLR) focuses on owning and operating technology-related real estate
- Community Healthcare Trust (NYSE: CHCT) as you can tell by the name, specializes in leasing healthcare real estate
Advantages of REITs for investors
- They allow retail investors to buy into properties they would need large amounts of capital for in the real estate market. You can start your own real estate empire from as little as $10 dollar a share.
- They are very liquid. As they act like shares, investors can buy and sell REITs with a lot of flexibility in comparison to traditional real estate which is one of the most illiquid assets.
- They’re a form of diversification. While a REIT is bought and sold like a stock, you shouldn’t treat it as one. Money in a REIT, however big or small, is your own personal real estate investment. It is a way of diversifying your portfolio away from bonds and equities without a major capital investment.
- Dividends. Dividends. Dividends. As mentioned above, one of the main attractions of a REIT is its guaranteed dividend.
While REITs offer a number of distinct advantages, they carry the same risks as any other asset class. You are not guaranteed returns automatically if you invest in a REIT. They are exposed to the peaks and troughs of the real estate market, a notoriously fickle sector, and due to the requirement to dole out 90% of its profits in the form of dividends, they are sometimes prone to rather slow growth. However, they remain a very enticing asset class worthy of any strong, diversified portfolio.