Investing in Real Estate with REITs: A Way to Enter the Market Without the Large Capital

Real estate can be one of the most lucrative investments, but for many, the barrier to entry is high. Buying a property outright requires a significant amount of capital, making it difficult for many to begin investing in the market. Fortunately, there’s an alternative way to invest in real estate without needing a large lump sum of money: Real Estate Investment Trusts (REITs).

What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, finances, or manages real estate properties. REITs make money through the income generated by these properties, whether it’s from rent or mortgage interest. By law, REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, which makes them attractive to income-seeking investors.

The unique structure of REITs allows them to avoid paying corporate taxes, which means they can reinvest more money into their real estate holdings and distribute higher dividends to shareholders. This makes REITs an excellent option for investors looking to generate income without having to manage properties themselves.

Types of REITs

There are two main types of REITs: equity REITs and mortgage REITs.

• Equity REITs: These REITs own and operate income-producing real estate, such as apartment buildings, shopping centers, office buildings, and more. They make money by collecting rent from tenants and occasionally selling properties for a profit.
• Mortgage REITs (mREITs): Instead of owning properties, mortgage REITs provide financing for real estate. They invest in mortgages or mortgage-backed securities, earning income through the interest on loans or by purchasing securities that generate regular payments.

Public, Non-Traded, and Private REITs

REITs can be categorized based on their trading status:

• Publicly Traded REITs: These REITs are listed on major stock exchanges and can be bought and sold just like stocks. They offer liquidity and transparency, as they are required to file regular reports with the SEC.
• Non-Traded Public REITs: These REITs are registered with the SEC but do not trade on stock exchanges. They are still available to the public, but they offer less liquidity and can come with higher fees.
• Private REITs: These REITs are not publicly traded or registered with the SEC. They are typically only available to accredited investors and are more difficult to sell or value. Private REITs tend to be more opaque in terms of financial disclosures.

Benefits of Investing in REITs

1. Income Generation: REITs typically offer high dividend yields, as they are required to distribute most of their taxable income to shareholders. This makes them a great option for investors seeking regular income from their investments.
2. Diversification: Investing in a REIT allows you to gain exposure to a diverse range of real estate assets without having to own individual properties. REITs typically hold multiple properties across different geographic locations and sectors, reducing your risk.
3. Liquidity: Publicly traded REITs can be bought and sold easily, giving you the flexibility to exit your investment if necessary. This makes them a more liquid option compared to direct property investments.
4. No Property Management: One of the challenges of investing in real estate is the time and effort required to manage the property. With REITs, the company handles the day-to-day management of properties, so you don’t have to deal with tenants or repairs.
5. Access to Real Estate Without a Large Investment: You don’t need a large sum of money to invest in real estate with REITs. You can start investing with a relatively small amount of capital, making real estate accessible to more people.

Risks of Investing in REITs

While REITs offer a number of benefits, they also come with risks:

1. Market Volatility: Like stocks, publicly traded REITs are subject to market fluctuations. If the stock market takes a downturn, your REIT investment could lose value.
2. Debt Levels: REITs often operate with high levels of debt, and if they’re unable to manage their debt effectively, it could affect their ability to pay dividends and grow their portfolios.
3. Interest Rate Sensitivity: Rising interest rates can negatively impact REITs, as they increase borrowing costs and reduce the value of existing properties. This can lead to lower dividends and stock prices.
4. Unsustainable Dividends: Some REITs may offer high dividend yields, but if the company is not able to sustain these payouts, they may be forced to cut dividends, which can negatively impact the stock price.
5. Governance Issues: Non-traded and private REITs may not have the same level of oversight as publicly traded REITs, which could lead to issues with management or transparency.

How to Invest in REITs

Investing in REITs is relatively simple, especially with publicly traded REITs. All you need is a brokerage account, and you can buy shares just like any other stock. There are also REIT ETFs available, which allow you to invest in a portfolio of REITs, further diversifying your investment.

Many 401(k) plans offer REIT options as well, so you may be able to allocate a portion of your retirement contributions to a REIT fund.

Should You Invest in REITs?

REITs can be a great way to diversify your portfolio and add exposure to the real estate market without the need for substantial capital. However, it’s important to assess your risk tolerance and investment goals before diving in. While REITs can provide steady income and long-term growth, they also come with their own set of risks.

Before investing in REITs, be sure to consult with a financial advisor to determine how they fit into your overall investment strategy. With the right approach, REITs can be a valuable addition to your portfolio and provide long-term benefits.

If you’re considering a move or investment and require a trusted Real Estate Broker, we’re here to assist you. Contact us via email at TEAM@McDanielCallahan.com, complete the form below, or give us a call at 925-838-4300. We are ready to provide expert guidance and support for all your real estate needs. Terry McDaniel DRE License #00941526