What Are REITs?
REIT is an acronym for real estate investment trust. REITs own portfolios of real estate-related assets, such as offices, apartments, retail, data centers, cell towers, hotels and factories that generate income through rent and capital appreciation. REITs provide value to shareholders through share price appreciation and dividend yield, but what makes REITs unique is that by law, they must pay out at least 90% of their annual taxable income to investors in the form of dividends.
There are three types of REITs:
- Equity REITs own and often operate income-producing real estate; each share of an equity REIT equates to a share of the actual real estate holdings.
- Mortgage REITs (mREITs) own either commercial or residential mortgages that have been purchased from banks or financial services companies or they invest in mortgage-backed securities (MBS).
- Hybrid REITs own both real property and mortgage securities.
Benefits Of Investing In REITs
The benefits of investing in REITs:
- They provide a high, steady dividend income along with long-term capital appreciation.
- Their dividend rate is higher than most equities or other fixed-income investments.
- REITs have a low correlation with other assets, which makes them an excellent choice for portfolio diversification.
- REITs are highly liquid; if you need to pull your money out, you simply sell your shares on a stock exchange.
- Their dividends are taxed as ordinary income up to the maximum rate of 37%, plus a separate 3.8% surtax on investment income; taxpayers can deduct 20% of their combined qualified business income, which includes qualified REIT dividends through December 31, 2025, making 29.6% the highest effective tax rate on qualified REIT dividends.
- REITs have a low minimum investment because you're buying shares, this makes the minimum investment the price of one share.
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How To Invest In REITs
There are several ways that you can buy shares of REITs:
- Publicly traded REITs: Shares can be bought and sold through a brokerage account just like stocks or exchange-traded funds, publicly traded REITs must be registered with the Securities and Exchange Commission (SEC) and make regular disclosures; the National Association of Real Estate Investment Trusts or Nareit, currently lists more than 200 publicly traded REITs.
- Public non-traded REITs: Shares can only be bought or sold through a broker who is participating in the REIT. Shares in public non-traded REITs are harder to value, have higher investment minimums, are more illiquid often requiring long hold times, come with higher fees than publicly traded REITs, and are often only available to accredited investors; public non-traded REITs must also be registered with the SEC and provide regular disclosures.
- Private REITs: Don't have to be registered with the SEC or make disclosures, this makes it harder to evaluate their performance or value the price of their shares, private REITs also have higher investor minimums and fees.
The Financial Industry Regulatory Authority, or FINRA, provides a warning to investors considering buying public non-traded or private REITs.
Nareit provides a searchable directory of REITs organized by:
- Location: Includes REITs located in Bermuda, Canada, Columbia, France, Japan, Mexico, Ukraine, and the U.S.
- Public/Private: Lists public, private and public non-listed REITs
- Sector: Nareit’s sectors are office, industrial, retail, lodging/resorts, residential, timberlands, healthcare, self-storage, infrastructure, data center, diversified, specialty and mortgage.
To show you how to choose the right REIT to invest in, I’m going to analyze several non-mREIT publicly traded REITs. In general, what you should look for are growth in rental income, growth in service income or an increase in economies of scale. In this article I look at two methods of analysis: top-down and a bottom-up. Top-down analysis considers macroeconomic factors while bottom-up analysis looks at specific company fundamentals.
Starting with a top-down analysis, a recent report by the National Association of Realtors (NAR) shows that the nationwide office vacancy rate has climbed to 12.8% from 12.0%. Following the Covid pandemic, many workers continue to work from home and hybrid work has become more common. Also, fears of a recession are causing many companies to pause in their search for new office space.
According to the same NAR report, the vacancy rate for industrial space is up 6% over last year, however, rent growth is continuing, making the industrial sector one of the few bright spots within commercial real estate.
The report shows that nationally the vacancy rate for retail space stands at 16.7%, and recent news has been full of stories about growing retail vacancies in cities such as San Francisco, New York City and Chicago.
The same NAR report shows that hotels and resorts are continuing their resurgence following the pandemic, with revenue per available room (RevPAR) over 10% higher than its pre-pandemic level. However, several recent reports including one from the New York Times show that travel "revenge spending" may be ending.
The residential sector hit a record high in 2021, but according to the NAR report, over the last year the residential vacancy rate has risen from 5% to 6.8%, and rents have dropped 8%.
Our top-down analysis has shown that there is less potential growth in the Nareit sectors of office, industrial, retail and lodging/resorts, so we’re going to look at REITs in the specialty, data center, diversified and healthcare sectors, and one standout in the Industrial sector. Using a bottom-up analysis, my main criterion is a REIT's one-year return. Remember when analyzing REITs, don’t use earnings per share, or EPS, as a measure of performance, but instead use funds from operations (FFO). FFO is calculated: FFO = Net Income + Depreciation + Amortization + Losses on Sales of Asset - Gains on Sales of Assets - Interest Income
With inflation running at 4.0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
Best REITs To Buy Now
Iron Mountain (IRM)
Specialty REIT. One-Year Return: 24.7%
Iron Mountain provides records management, data management, document management, data centers and art storage. IRM has a market cap of $16.6 billion, a dividend yield of 4.3% and a dividend amount of $0.62. Current share price is $56.76, and 80.1% of shares in IRM are held by institutions, including the Vanguard Group, Blackrock and State Street. Analysts' consensus is a Buy.
VICI Properties (VICI)
Specialty REIT. One-Year Return: 16.8%
The company owns a portfolio of gaming, hospitality and entertainment destinations that are leased to industry-leading gaming and hospitality operators. Properties include iconic resorts in Las Vegas such as Caesars Palace, MGM Grand and the Venetian. Currently, VICI's portfolio contains 44 gaming facilities, 58,700 hotel rooms and more than 450 restaurants, bars, nightclubs and sportsbooks. VICI's market cap is $32.7 billion, its dividend yield is 4.8% and its dividend amount is $0.39. The current share price is $32.34 and 98.5% of VICI's shares are held by institutions, including the Vanguard Group, Blackrock and State Street. Analysts' consensus is between a Buy and a Strong Buy.
Equinix (EQIX)
Data Center REIT. One-Year Return: 23.9%
The company provides digital infrastructure and digital services. This REIT has a market cap of $72.1 billion, a dividend yield of 1.8% and a dividend amount of $3.41. The current share price is $778.61, and 96.6% of shares are held by institutions, including the Vanguard Group, Blackrock and State Street. Analysts' consensus is a hair above Buy with seven putting EQIX at a Strong Buy.
Howard Hughes (HHC)
Diversified REIT. One-Year Return: 15.7%.
The company develops, owns and manages commercial, residential and mixed-use real estate in the form of master-planned communities throughout the U.S. These include the Seaport in New York City, the Woodlands, Bridgeland and the Woodlands Hills in the Houston, Texas area, and Summerlin in Las Vegas. HHC has a market cap of $3.8 billion. The current share price is $76.10, and 97.0% of shares are held by institutions, including Pershing Square Capital Management, the Vanguard Group and Baillie Gifford and Company. Analysts' consensus is Buy.
Prologis (PLD)
Industrial REIT. One-Year Return: 12.8%
The company leases distribution facilities to around 5,200 customers within two major categories: business-to-business and retail/online fulfillment. It has a Market Cap of $112.3B, a Dividend Yield of 2.86%, and a Dividend Amount of $0.87. Its current stock price is $122.63, and 95.37% of shares are held by institutions including The Vanguard Group, Inc., Blackrock Inc., and State Street Corporation.
Diversified Healthcare (DHC)
Healthcare REIT. One-Year Return: 53.72%
The company owns and operates healthcare properties throughout the U.S. with more than 600 tenants, more than 10 million square feet of life science and medical office properties and approximately 28,000 senior living units. DHC's market cap is $686 million, it has a dividend yield of 1.4%, and its dividend amount is $0.01. The current share price is $2.57, and 76.04% of shares are held by institutions, including the Vanguard Group, Blackrock and Charles Schwab Investment Management. Analysts' consensus is Hold.
If you don't want to go all in on an individual REIT, you can invest in a REIT mutual fund or a REIT ETF.
The top REIT mutual funds include:
- Cohen & Steers Real Estate Securities I (CSDIX)
- Delaware Global Listed Real Assets Inst (DPRXS)
- Manning & Napier Real Estate I (MNRIX)
- Baron Real Estate Fund (BREIX)
- James Alpha Global Real Estate Investments I (JARIX)
- Pacer Benchmark Industrial RE SCTR ETF (INDS
The top-rated REIT ETFs include:
- Vanguard Real Estate Index Fund (VNQ) has a fund size of $36.8 billion, a yield of 3.9% and annual fees of 0.12%. It owns the REITs American Tower and Equinix.
- Real Estate Select Sector SPDR (XLRE) has a fund size of $5.3 billion, a yield of 3.5% and annual fees of 0.1%. It owns Prologis, American Tower and Equinix.
- Invesco KBW Premium Yield Equity REIT (KBWY) is small at $284 million but it has a giant yield of 9.7%. However, its annual fee is a large 0.35%. It holds Office Properties Income, Global Net Lease and The Necessity Retail REIT.
Frequently Asked Questions (FAQs)
What are the tax implications of investing in REITs?
REITs are required by law to distribute at least 90% of their taxable income to shareholders, which means that investors may have to pay taxes on their dividends.
Can REITs help diversify my portfolio?
Yes, investing in REITs can provide diversification benefits due to their low correlation with other asset classes, such as stocks and bonds.
Are there any risks associated with investing in REITs?
Like any investment, REITs come with risks, including market volatility, interest rate fluctuations, and changes in the real estate market. It's important to do your due diligence before investing.
How can I choose the best REIT to invest in?
Consider factors such as the management team's track record, the REIT's financials and performance history, and the sector the REIT operates in. It's also important to evaluate the REIT's investment strategy and risk management practices.
With inflation running at 4.0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz.
