Real estate investment trusts, or REITs as they are more commonly known, are investment vehicles that allow investors to purchase an interest in a portfolio of properties. At its most simple, think of a REIT as a pool of money consisting of the contributions of many small individual and institutional investors which then uses the proceeds of those contributions to invest in a portfolio of properties. The proceeds from the rents from the properties owned by the REITs are then paid out to the REIT’s investors as dividends. There are multiple types of REITs dependent on what type of properties the particular REIT invests in, but the most common include retail REITs, which invest in shopping malls and freestanding stores, residential REITs, which invest in multifamily housing like apartment communities or condominium complexes, office REITs, which purchase office buildings, and healthcare REITs, which invest in the real estate upon which hospitals, nursing homes, and medical centers are located. There are also mutual funds and exchange traded funds that invest solely in REITs that allow investors to gain access to this asset class without necessarily having to do their homework to pick a specific REIT in which to invest. Instead, the investor can just buy shares in the fund and let the fund managers choose the REITs for the investors.
Many investors are attracted to REITs due to their relatively high yields compared to other income-producing products in the marketplace. These investment vehicles typically often offer much more attractive dividend yields than safer, more plain vanilla financial products like a savings account or a certificate of deposit. That is perhaps their greatest benefit, particularly in today’s era of ultra-low interest rates. They also offer the opportunity for capital appreciation, as they can rise in price between when an investor buys shares in a REIT and ultimately sells those shares.
REITs are also typically highly liquid in that they are traded on most exchanges and can easily be bought and sold at will by investors through brokerage accounts. They can also be bought and sold in a variety of formats, from the direct purchase of shares in the actual REIT itself to the purchase of shares in exchange traded funds or mutual funds which invest solely in REITs, resulting in indirect ownership of REITs for fund investors.
However, REITs are also not without their drawbacks. Unlike bank accounts, the contents of which are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation, a REIT’s returns are not guaranteed. The REIT’s ability to make payments to its investors relies upon its receipt of money from the tenants of the properties of it owns; therefore, if those properties are vacant or the tenants are not paying their rent in a timely manner, then the REIT’s dividends likely are not being paid as expected. Accordingly, there is a chance that an investor will not receive the payments he or she was anticipating when he or she bought an interest in a REIT. REITs also are not guaranteed not to drop in price. During a period during which the value of the underlying real estate assets held by the trust is plummeting, a REIT can plummet in price or become highly illiquid, meaning that it can be difficult to offload in a market in which its prices are dropping.
However, on balance, REITs can be a good investment class to have in your portfolio. For instance, in a study conducted by the website Investopedia, they were found to be the second best performing asset class behind mid-cap stocks for the period 1990-2010, returning an average of 9.9%. Accordingly, consider investing in this asset class either directly if you have a brokerage account or indirectly by purchasing shares in a mutual fund or exchange traded fund dedicated to this asset class.
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