REITs: Real Estate Investment Trusts

REITs allow you to invest in real estate without buying physical property. They offer income, diversification, and inflation protection in a liquid, stock-like format. [DEFINITION] REIT (Real Estate Investment Trust): A company that owns, operates, or finances income-producing real estate. REITs must distribute at least 90% of taxable income as dividends and trade on major exchanges. ### How REITs Work REITs pool investor capital to own real estate: 1. The REIT buys properties (apartments, offices, malls, warehouses) 2. Tenants pay rent to the REIT 3. The REIT distributes most income to shareholders as dividends 4. You receive regular dividend payments [EXAMPLE] You invest $10,000 in a REIT yielding 5%. You receive $500 annually in dividends. If the properties appreciate and the REIT's value rises 3%, your total return is 8% ($500 income + $300 appreciation). ### Types of REITs **Equity REITs:** Own and operate properties - Residential (apartments) - Office buildings - Retail (malls, shopping centers) - Industrial (warehouses, distribution centers) - Healthcare (hospitals, senior housing) - Data centers - Cell towers **Mortgage REITs (mREITs):** Finance real estate through mortgages - Higher yields but more interest rate sensitive - More complex and volatile [KEY] REITs provide real diversification because real estate often moves differently than stocks and bonds. Adding REITs to a portfolio can reduce overall volatility. ### REIT Advantages - **Liquidity:** Buy and sell like stocks - **Income:** High dividend yields (often 3-6%) - **Diversification:** Low correlation with other assets - **Inflation hedge:** Rents typically rise with inflation - **Professional management:** No landlord headaches ### REIT Considerations [TIP] Hold REITs in tax-advantaged accounts when possible. REIT dividends are typically taxed as ordinary income rather than the lower qualified dividend rate. ### How to Invest in REITs - **Individual REITs:** Research specific companies - **REIT ETFs:** VNQ (Vanguard), IYR (iShares), SCHH (Schwab) - **REIT mutual funds:** Diversified real estate exposure [EXERCISE] Your portfolio is 60% stocks, 40% bonds. You want to add 10% REITs. How should you adjust your allocation? |ANSWER| You could take 5% from stocks and 5% from bonds, resulting in 55% stocks, 35% bonds, 10% REITs. Alternatively, take the full 10% from either stocks or bonds depending on your goals. REITs have characteristics of both, so splitting the allocation makes sense. [WARNING] Retail-focused REITs face challenges from e-commerce. Office REITs face uncertainty from remote work trends. Diversify across REIT sectors rather than concentrating in one type.