They are a more liquid alternative to traditional commercial and residential real estate investing while still having exposure to the real estate market.
Often when investors think of the real estate market, homeownership, “flipping” and buying commercial real estate, comes to mind. Since 1960, investors have been able to also invest in real estate in the manner that one buys and sells stocks on a publically-traded exchange by using real estate investment trusts (REITs). A REIT is a company that owns or invests in institutional grade,1income-producing property and sells share of their REITs on a publically-traded exchange like a stock or a bond.
While REITs can take several forms, they typically own or invest in leased commercial properties. The rental income is then invested into their asset base or returned to shareholders through dividends. Some REITs diversify by investing in multiple property types, however, most publicly traded REITs in the U.S. focus only on one particular property type.
Benefits of REITs
- Performance and diversification. REIT stocks have low correlation with other equities and fixed income vehicles. This helps build a diversified portfolio which can produce larger returns.
- Dividend growth/inflation hedge. REITs are required by law to distribute at least 90 percent of their taxable income. This means that as inflation causes increased rental rates and property value, a REIT’s income, cash flow and dividends are positioned to increase as well. It’s worth noting that in 13 out of the last 17 years, REITs have outperformed the S&P 500® Index.
- Liquidity and transparency. Public REIT shares trade on the open market and can be sold relatively quickly compared to privately held real estate, which is generally brokered and takes several months to close. Additionally, REITs are subject to SEC regulation, including strict protocols about performance reports.
- Experienced professional management. REITs typically have experienced teams of professionals in place to manage, maintain and run the properties.