Real Estate Investment Trusts
Real estate investment trusts, or REITs, are a way to invest in property through major exchanges where dividends are paid. This guide will outline what REITs are, how they work, the different types, plus the benefits and criticisms. We also explain how to start trading REITs and compare the top brokers that offer investing in real estate investment trusts.
Top Brokers With REITs for United States
REITs Explained
Real estate investment trusts are best described as companies that own and manage property. But unlike investing in physical property, REITs allow investors to access the income from these firms through dividends, without having to own or manage real estate themselves.
How Does it Work?
REITs essentially pool the capital of many investors, like mutual funds, so individuals can financially gain from real estate profits rather than just large financial intermediaries or wealthy business people.
Most REITs finance themselves by going public and trading on an exchange which gives investors the ability to buy and sell ‘units’ like stocks and shares. For example, one of the best real estate investment trusts, American Tower, is publicly traded on the NYSE (New York Stock Exchange).
Importantly, REIT units represent liquid assets, which can generate sustainable long-term revenue for investors.
Types of REITs
Real estate investment trusts can be classified into several types depending on how they are traded, the type of asset they offer, and what sectors they operate in:
Public vs Private
Real estate investment trusts can either be public or private. While any ‘dummies’ can invest in public REITs on exchanges across the world, only certified investors can trade private REITs such as the B.F. Saul Real Estate Investment Trust and the Pier 4 Real Estate Investment Trust.
Private REITs are harder to regulate and therefore require more experienced investors (aspiring Warren Buffetts), though they tend to have a more stable price because they aren’t so reliant on the market.
Equity vs Mortgage vs Hybrid
The three types of real estate investment trusts are mortgage, equity, and hybrid REITs. Most are equity REITs, which own and manage income-producing real estate. Revenues are generated through rent, not flipping or reselling properties.
Mortgage REITs unsurprisingly generate income through mortgages. Profits are gained from the margin between the interest generated from loans given to property owners and the cost of the loans.
Hybrid REITs are a mixture of both investments in properties and mortgages, so interest from loans and rent provide the income.
Property Sector
Generally, real estate investment trusts specialise in a particular sector so have certain holdings. For example, there are several REITs for retail that have holdings in shopping centers. Other properties in a portfolio could include office and apartment buildings, hospitals, banks, malls, gas stations, forestry, and hotels. In particular, there are a growing number of real estate investment trusts focused on data centers.
Open-End REITs Vs Closed-End REITs
Open-end real estate investment trusts have no limit to the number of shares that can be created while closed-end REITs have a fixed number of shares. Schroder Real Estate Investment Trust Limited is a good example of a closed-ended real estate investment company.
History of REITs
REITs were launched in the United States under President Dwight D. Eisenhower who introduced the Real Estate Investment Trust Act in 1960. They aimed to combine the benefits of investing in real estate with the features of the stock market to provide investors with a pass at income while also minimising corporate tax.
Financial modelling was based upon mutual funds to allow investors access to the income from diversified, large portfolios of property through the trading of public REIT units.
After the first REIT, American Realty Trust was successful, they spread across the US from Washington D.C. to New York to Texas. Over time, they experienced development from solely offering mortgage REITs to also providing access to equity REITs.
Then in 1986, the Tax Reform Act gave companies who owned REITs the ability to operate and manage their real estate. This saw a shift in REITs turning from private entities to public companies and by 1994, the REIT market had a capitalisation of $44 billion. As of 2022, the United States has over 200 listed REITs while the largest global REIT, American Tower, has a capitalisation of $102.3 billion.
Today, real estate investment trusts are global, with 40 countries including all G-7 nations having an active REIT system.
Pros & Cons of Trading REITs
Like any investment, real estate investment trusts have their benefits and drawbacks. For example, REITs generally supply investors with high yield dividends. However, REITs are not taxed at the corporate level meaning that received dividends are taxed as ordinary income which is normally charged at a higher tax rate than qualified dividends.
Other advantages and disadvantages include:
Pros
- Liquidity – REITs that are publicly listed in the stock market have high liquidity making buying and selling units easier than investing in physical property.
- Portfolio enhancement – REITs can help diversify an investor’s portfolio that may be focused on forex and commodity holdings, for example.
- Steady income – The payment of monthly dividends from REITs can provide a stable cash flow for investors.
- Attractive returns – Real estate investment trusts have an attractive return rate, evidenced by the fact they have been outperforming the S&P 500 Index and the rate of inflation over the last two decades.
Cons
- Limited growth – While REITs have the potential for long-term capital appreciation, growth is often more gradual meaning they may be unsuitable for investors seeking fast returns.
- Susceptible to interest rate fluctuations – Market volatility can cause REITs’ prices to change regardless of their value. To keep updated a good benchmark for REIT stock prices is the 10-year Treasury yield.
- Risks associated with specific properties – REITs each encompass a type of property. With that in mind, you may want to invest in different types of REITs where certain sectors present more reliable returns, for example, healthcare. REIT ETFs can also be an effective way to diversify risk.
How to Start Investing in REITs
1. Select a Type of REIT
Most beginners are not certified investors so will only have access to public REITs. With that in mind, you can invest in public REIT mutual funds and exchange-traded funds (ETFs). ETFs are a diversified portfolio of REITs. This means you can invest in a group of REITs which represent different real estate sectors.
REIT ETFs are offered by multiple companies including Fidelity, Cominar, True North Commercial REIT, Vanguard, and the RioCan Real Estate Investment Trust.
2. Investigate Regulations and Taxation
Think about where to buy your real estate investment trust. Many countries regulate REITs differently. For example, in Jamaica REITs are not officially regulated and so have no tax breaks. In contrast, in the USA, REITs have special tax benefits and are regulated by the Securities and Exchange Commission (SEC).
It is important to find a country that has suitable tax laws for your status. Think about how much you want to invest and once you find a country, investigate where REITs are listed. For example, most Australian real estate investment trusts appear on the Australian Securities Exchange (ASX). Some exchanges allow trading on their platform but finding a top broker that deals with REITs is preferable (more on that shortly).
3. Choose a Real Estate Investment Trust
After finding a broker, search for the list of real estate investment funds they offer and compare their yield, dividend history (i.e. historical returns), growth potential, key activities, and real estate type.
It is often a good idea to select REITs that have a lower gear ratio (this is the debt-to-equity ratio of a company), as it typically means less risk. A REIT with high dividends and prospects for growth is also a positive place to start. Finally, before you buy REIT units, check for share price fluctuations.
4. Purchase Shares
When you think the REIT has a positive outlook, purchase units as shares through your chosen broker or exchange. The best firms offer one-click trading and a range of instant and pending order types.
5. Receive REIT Dividends
You should be issued a fee per share monthly, quarterly or yearly. This is often paid through your broker, who may keep a small fee.
6. Sell, Buy or Reinvest
Once you have got the hang of buying REITs, you can choose to resell your current shares or reinvest using your dividends. Perhaps it is time to buy a different property type?
Comparing Brokers
Finding a top-rated broker is an important step in getting started trading REITs. Consider the following:
- Fees: Real estate investment trusts can have high fees plus charges for withdrawals which could reduce your profits. With that in mind, look for a broker with no or low minimum deposit and the least transaction and withdrawal fees. eToro and IC Markets, for example, are brokers with low minimum deposits and fees.
- Regulations: To protect your investments and get the best security, find a broker that is regulated by a trusted agency. Fidelity and TD Ameritrade are both highly regulated brokers that offer trading on REITs.
- Document access: Some brokers permit access to a real estate investment trust’s financial documents on their platform, which can prove useful. This is a convenient extra that can save time on research. The best firms also offer straightforward profit calculators and tips on the highest quality structure analysis and strategy.
Bottom Line on Trading REITs
Real estate investment trusts allow investors to reap the rewards from property without huge amounts of capital or the hassle of managing physical real estate. The features and opportunities of REITs mean that they often consistently produce high-yield dividends and stable incomes for traders.
To get the best outcome from your financial contributions and to reduce any risks, you should choose your REITs according to their outlook, historical performance, dividend history, and growth potential. Also remember to avoid skewing your holdings to one property type by investing in ETFs or multiple REITs.
FAQ
How Are Real Estate Investment Trusts Taxed?
Real estate investment trust companies are generally exempt from corporate income tax as they pay out 90% or more of their taxable profits in dividends to their shareholders. This means REIT taxation centers on the shareholders who receive dividends, which are taxed like regular dividends.
What Countries Offer Real Estate Investment Trusts?
Real estate investment trusts are prevalent globally and are regulated for trading in over 40 countries. They are offered in Europe (e.g. UK, Germany, Greece, Ireland) Africa (e.g. Nigeria, Egypt, Zimbabwe, Ghana, South Africa, Kenya) Asia (e.g. Japan, Vietnam, Singapore, Dubai, Philippines, Sri Lanka, Pakistan) the Americas (e.g. USA, Canada, Mexico) and Australasia (e.g. New Zealand, Australia).
Are Real Estate Investment Trusts Worth It?
Investing in real estate investment trusts could be beneficial as records show they deliver high total returns with lower risks. REIT investments can also diversify portfolios and their liquidity benefits mean shares can be sold efficiently unlike owning physical properties.
Are Real Estate Investment Trusts Halal?
Not all real estate investment trusts are halal but some Shariah-compliant REITs are offered in Muslim practising countries like Oman, Malaysia, and the UAE. Speak to a local religious leader for more guidance.
Where Can I Find More Information On REITs?
If you are interested in learning more about real estate investment trusts there are several resources available online and offline. These include handbooks and PDFs (one of the best books is Investing in REITs: Real Estate Investment Trusts, 4th Edition). You can also look to websites such as YouTube, Journal Articles, and social forums, for example, ZoomInfo and TD Ameritrade Yahoo Finance, plus Quizlet (a way to test your knowledge).