Real estate investment trusts (REITs) can be a great way to decrease investment portfolio volatility and strengthen it overall. However, new real estate investors may not know where to start.
Real estate (especially residential real estate) can be an incredibly dependable investment, even in times of economic turmoil. That can be helpful during a recession or depression.
On the other hand, investors who only invest in stocks can find themselves in a grim situation during such economic struggles.
This article will break down the benefits of REITs as well as which ones perform the best.
What is a REIT?
A real estate investment trust (REIT) is a company that owns investment properties and may operate them as well. Investing in these companies provides funding for ongoing real estate projects.
While purchasing your own properties can be easy, REITs are another solution for those who want an easy way to invest in real estate.
In return for their investments, REITs pay investors a regular dividend. In fact, the SEC requires REITs to pay out at least 90% of their income as dividends to qualify as securities.
REITs that meet this goal don’t have to pay federal taxes. This leaves more to pay in dividends; however, the high payout ratio does mean REITs often have high levels of debt.
Debt isn’t necessarily a bad thing, though, particularly when revenues are steady. As long as a debtor knows it will be able to repay its debt, it can leverage that debt to expand its business.
Overall, REITs are a solid investment opportunity that allows investors to earn a steady dividend and strengthen their portfolios.
Types of REITs
There are two basic types of REITs. Let’s briefly cover what each of them entails.
Equity REITs
Equity REITs own and often operate income-producing properties such as shopping malls, apartment buildings, and office buildings. Because equity REITs own buildings and lease them to tenants, they make money by collecting rent.
This is probably the simplest type of REIT and, indeed, the type most commonly seen. As mentioned earlier, equity REITs pay out the majority of their income in the form of dividends.
In addition, in the context of investing, “equity” is synonymous with “security.” Thus, equity REITs are the ones you will find trading on the open market.
Mortgage REITs
Mortgage REITs are not quite as common and not quite as concrete in nature. Rather than owning properties directly, mortgage REITs, or mREITs, make money by providing or by purchasing mortgages or mortgage-backed securities.
Shares of an mREIT can be purchased on most major exchanges or as part of an ETF. mREITs often have higher dividend yields than equity REITs, but often come with a higher risk in exchange.
mREITs may purchase residential and/or commercial properties. Usually, they invest in one or the other, but will sometimes invest in both.
How Can I Invest in a REIT?
Mentioned above is the fact that REITs must pay out 90% of their income to be classified as securities. The term “securities” usually refers to financial instruments such as stocks, bonds, and mutual funds that are traded on an exchange.
In other words, anyone with a brokerage account or IRA can likely buy shares of a REIT. Employer-sponsored plans, such as a 401k, may not have REITs available because employers select the securities available in their retirement plans.
Regardless of your situation, if REITs can be found by ticker symbol, then investing in them is as simple as buying shares.
Best Equity REITs
Equity REITs come in multiple forms, including buying shares of an individual REIT or buying shares of a REIT exchange-traded fund (ETF). For the purpose of this article, we will only consider individual REITs.
Innovative Industrial Properties Inc (IIPR)
IIPR is probably one of the more unique REITs on this list. Its business is to provide funding for the medical-use cannabis industry.
This is very much a growing industry given that a growing number of states have approved cannabis for medical use. It isn’t yet legal at the federal level, but if that happens, there could be much more growth.
And, of course, this REIT has great growth to match. The REIT itself has grown more than 60% over the past year with a modest dividend yield of just under 4%.
Goodman Group (GMGSF)
Goodman Group manages both senior living facilities and residential communities. It also provides other services, including interior design and commercial properties.
GMGSF shares have grown 30% over the past year, with a dividend yield of about 1.5%.
Power REIT (PW)
Power REIT’s share price has grown more than 100% over the past year. It did start with a share price under $10, but this level of growth is not to be overlooked.
Interestingly, the share price saw its biggest increase as the COVID-19 pandemic began to really pick up steam. The REIT specializes in sustainable real estate such as greenhouses, solar farms, and transportation.
That makes it perfect for those who value sustainability. Unfortunately, it is not currently paying dividends.
Safehold Inc (SAFE)
Rounding out this part of the list is Safehold Inc (SAFE). Safehold specializes in ground leases rather than the buildings themselves.
For investors, SAFE has numbers worthy of your attention. Its share price has grown almost 90% over the past year with a dividend yield of around 1%.
Best mREITs
Because mREITs can provide some exceptional returns, they are worth a look – despite the added risk.
Here are some of the best mREITs to grow your wealth.
Arlington Asset Investment Corp. (AI)
AI invests in “mortgage-related and other assets” and has a stellar dividend yield of over 20%. Its dividend has actually been trending in the wrong direction as of late, but for now, it remains strong.
Colony Credit Real Estate Inc (CLNC)
Colony Credit Real Estate specializes in commercial real estate. While its dividend is not currently quite as high as that of AI, its dividend is experiencing positive growth. During an economic boom, this kind of REIT can provide excellent returns as people go out and spend.
Ready Capital (RC)
Ready Capital provides financing for a variety of purposes, including single-family homes, multi-family homes, and also provides business loans.
This somewhat unique mREIT pays a high dividend. Plus, the fact that it deals in more than just single-family home mortgages gives it the diversity to weather both good and bad economic conditions.
Redwood Trust (RWT)
RWT deals specifically in single-family and multi-family homes. However, it also provides business-purpose loans and what it refers to as third-party loans.
Redwood Trust’s dividend has dropped as of late, but that doesn’t mean it isn’t worth considering. It still has a nearly 10% dividend, and residential real estate is always in demand.
Should You Invest in a REIT?
REITs can be an effective way to build wealth while adding some much-needed diversity. That said, every REIT is different, so buying shares in multiple sectors may be a good idea.
For example, in this article, we have covered many different sectors, including commercial real estate, residential real estate, business financing, and even financing for medical-use cannabis.
For easier diversification in REIT investing, it may be wise to consider REIT ETFs. However, keep in mind that while REIT ETFs are potentially less volatile, you will see a lower return on them as a result.
All in all, REITs provide a steady, reliable income. While the return may not be quite as high as it would be for a landlord, REITs remove almost all of the work, the barrier to entry is much lower, and so is the risk.
Those looking to make their portfolio stronger and more diverse should consider adding a mix of REITs to take advantage of the always-in-demand real estate.