What is a REIT?
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. By investing in REITs, individuals can buy shares in these companies, similar to purchasing stocks. The primary way to earn returns from REITs is through dividends. REITs typically own a variety of property types, such as apartments, warehouses, self-storage facilities, malls, and hotels. You can invest in REITs through a brokerage account, making it an accessible method for diversifying your investment portfolio with real estate.
How Do REITs Work?
REITs were created by Congress in 1960 to allow individual investors to own equity stakes in large-scale real estate enterprises. This structure made it easier to buy and trade a diversified real estate portfolio. REITs must comply with specific IRS regulations, which include:
- Distributing at least 90% of their taxable income as dividends to shareholders annually.
- Investing at least 75% of total assets in real estate or cash.
- Earning at least 75% of gross income from real estate-related sources, such as rents or mortgage interest.
- Having a minimum of 100 shareholders after the first year.
- Ensuring that no more than 50% of shares are held by five or fewer individuals during the last half of the taxable year.
These rules allow REITs to avoid paying corporate taxes, enabling them to finance real estate more cost-effectively and return more profits to investors.
How Much Can I Make with REITs?
To assess potential returns, it’s helpful to compare benchmarks. For example, the S&P 500 tracks the performance of 500 major U.S. companies, while the FTSE NAREIT All Equity REITs Index tracks equity REITs. Historically, from 1972 to 2019, REITs provided an average annual return of 11.8%, compared to the S&P 500’s 10.6%. While this doesn’t mean REITs are inherently better than stocks, including REITs in your portfolio can enhance diversification and potentially reduce risk.
Best-Performing REIT Stocks: May 2024
As of May 2024, some of the top-performing publicly listed REITs include:
- Diversified Healthcare Trust (DHC): With a 1-year total return of 162.86%, the share price is $2.36.
- SL Green Realty Corp. (SLG): Achieved a 1-year total return of 129.09%, with a share price of $49.83.
- Uniti Group Inc. (UNIT): Recorded an 88.43% 1-year total return, with shares priced at $5.75.
- Vornado Realty Trust (VNO): With a 1-year total return of 75.08%, the share price stands at $26.03.
- Industrial Logistics Properties Trust (ILPT): Reached a 1-year total return of 72.94%, with shares at $3.52.
Best-Performing REIT Mutual Funds: May 2024
For those who prefer mutual funds, some top performers are:
- Baron Real Estate Income Institutional (BRIIX): With a 1-year return of 5.32% and an expense ratio of 0.80%.
- JHancock Real Estate Securities R6 (JABIX): Offering a 1-year return of 4.04% and an expense ratio of 0.81%.
- Cohen & Steers Real Estate Securities (CSDIX): Providing a 1-year return of 2.50% with an expense ratio of 0.84%.
- BlackRock Real Estate Securities Institutional (BIREX): With a 1-year return of 1.88% and an expense ratio of 0.75%.
- Guggenheim Risk Managed Real Estate Institutional (GURIX): Recording a 1-year return of 1.86% with an expense ratio of 0.90%.
Best-Performing REIT ETFs: May 2024
Popular REIT ETFs include:
- Pacer Industrial Real Estate ETF (INDS): With a 5-year return of 6.26% and an expense ratio of 0.55%.
- Real Estate Select Sector SPDR Fund (XLRE): Offering a 5-year return of 3.48% with an expense ratio of 0.09%.
- Nuveen Short-Term REIT ETF (NURE): Providing a 5-year return of 3.47% and an expense ratio of 0.35%.
- iShares Residential and Multisector Real Estate ETF (REZ): With a 5-year return of 3.07% and an expense ratio of 0.48%.
- iShares Core U.S. REIT ETF (USRT): Recording a 5-year return of 2.59% with an expense ratio of 0.08%.
Types of REITs
REITs are categorized into three main types based on their holdings:
- Equity REITs: These own and operate income-generating real estate.
- Mortgage REITs: These provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities.
- Hybrid REITs: These combine the investment strategies of both equity REITs and mortgage REITs.
Conclusion
Investing in REITs offers an accessible way to include real estate in your investment portfolio without the need to directly manage properties. With a variety of REIT stocks, mutual funds, and ETFs available, you can tailor your investment strategy to meet your financial goals and risk tolerance. Always consider the specific characteristics and risks associated with different types of REITs before investing.