Nearly 145 million Americans, plus countless institutional investors and family offices, invest in REITs– either directly, through REIT mutual funds, or via exchange-traded funds (REIT ETFs). REIT stocks have historically delivered competitive returns, reliable dividend income, and long-term capital appreciation for property investment and commercial real estate investors.
In this article, we’ll explain how REIT stocks work, the pros and cons of REITs, and some of the best REIT stocks to invest in this year.
What are REIT stocks?
A real estate investment trust (REIT) is an income property organization that acquires and manages income-producing commercial real estate.
REITs invest in commercial real estate asset classes like retail real estate, office buildings, apartments and multifamily property, leisure and hospitality assets, industrial properties, and special purpose real estate investments such as self-storage or data centers.
The largest publicly traded REITs have proven track records of performance and provide investors with regular dividend payments. Those are merely two reasons why real estate investment advisors recommend REITs as a promising passive real estate investment.
How a REIT Works
Unlike real estate companies that develop real estate for resale, a REIT buys and manages property as part of its own investment portfolio. The US government established REITs in 1960 to provide large and small investors easy access to income-producing real estate.
To qualify as a REIT, companies must meet the following conditions:
- Invest at least 75% of total assets in real estate assets and cash.
- Derive at least 75% of gross income from real estate-related sources, such as rents and interest on mortgages for financial property.
- 90% or more of taxable income must be distributed to shareholders annually, usually as dividends.
- Have fully transferable shares.
- Have a minimum of 100 shareholders after first year as a REIT.
- Have no more than 50% of shares held by five or fewer individuals during the last half of the taxable year.
Common Types of REITs
REITs generally fall into one of three main categories, along with some often-overlooked special-purpose asset classes:
Common REIT types
- Equity REITs own the underlying real estate and act as landlord, collecting rents, as well as managing and maintaining the property.
- Mortgage REITs own the debt securities secured by the property;while they may be riskier than equity REITs, they normally pay higher dividends to investors.
- Hybrid REITs are a combination of equity and mortgage REITs and can potentially provide investors with better risk-adjusted returns.
Special purpose REITs
- Industrial REITs include warehouses, cold storage, and distribution centers.
- Datacenter REITs include buildings that house switches, storage systems, and routers.
- Self-storage REITs own and operate self-storage facilities.
- Lodging and hospitality REITs own, acquire, and manage hotels, luxury resorts, and business-class hotels.
- Timberland REITs invest in forest land assets and generate income by harvesting timber and related products.
- Infrastructure REITs property types include energy pipelines, telecommunications towers, fiber cables, and wireless infrastructure.
Pros and Cons of REIT Stocks
As with any type of commercial real estate investment, there are benefits and drawbacks to REIT stocks that investors should be aware of:
Benefits of REIT stocks
- Recurring dividends with 90% of taxable income distributed to shareholders.
- REITs pay no corporate taxes, maximizing dividend payments to investors.
- Access to high-quality commercial real estate, including shopping centers, iconic office buildings, and single-family home developments.
- Very liquid because REITs trade on the major stock exchanges and can easily be bought and sold online.
- Portfolio diversification geographically and by asset classes to protect capital through economic ups and downs.
- Higher potential returns due to regular dividend distributions and appreciation of asset values over the long term.
Drawbacks of REIT stocks
- Dividends distributed to shareholders are taxed as ordinary income unless REIT stocks are held in an IRA.
- Interest rate changes can affect the level of debt service in a REIT, as with other types of real estate investments.
- REITs may have lower growth and capital appreciation because most profits are paid out to investors as dividends.
- Some asset classes held by REITs may have higher potential property-specific risk than others.
- REITs are ideal as a long-term buy-and-hold investment that may not suit the needs of every real estate investor.
Things to Look For in a REIT
Before buying a REIT stock, there are several things an investor should keep in mind:
- Best REITs provide consistent high dividends along with long-term capital appreciation.
- REITs are highly liquid, with stocks trading on all major exchanges instead of directly owning illiquid real estate.
- A REIT’s funds from operations is a better way to assess the true value of the REIT because depreciation expense can understate the actual value of the assets held.
- Search for REITs that have a historical track record of success through all stages of the economic cycle.
- Look for REITs that own quality property leased to stable regional or national tenants.
Best REIT Stocks for 2021
Kiplinger is an American publisher of business forecasts and personal finance advice. The company recently listed the 13 best REITs to own this year for real estate investors seeking diversification and more income than the market average:
|REIT||Symbol||Type||Market Value||Dividend Yield|
|Iron Mountain||IRM||Data Storage||$8.7 billion||9.7%|
|W.P. Carey||WPC||Net Lease REIT||$11.7 billion||6.3%|
|Physicians Realty||DOC||Healthcare||$3.7 billion||5.2%|
|Realty Income||O||Net lease retail||$20.9 billion||4.9%|
|STAG Industrial||STAG||Warehouses||$4.5 billion||4.8%|
|STORE Capital||STOR||Single-tenant net||$8.2 billion||4.7%|
|American Campus||ACC||Student Housing||$5.9 billion||4.5%|
|Digital Realty||DLR||Global data centers||$37.4 billion||3.4%|
|Innovative Ind.||IIPR||Cannabis||$4.2 billion||2.7%|
|Equity LifeStyle||ELS||Multifamily housing||$10.9 billion||2.3%|
|American Tower||AMT||Telecomm||$95.5 billion||2.2%|
REIT stocks offer something for every type of real estate investor, from high-quality commercial real estate assets to niche special purpose properties. Investing in REIT stocks is prudent, as it provides solid long-term performance, healthy and stable dividend yields, and portfolio diversification to its shareholders.