What Is a Real Estate Investment Trust (REIT)?

While home ownership represents the American dream, you don’t have to actually purchase commercial or residential buildings to take advantage of the lucrative property market. There is an alternative. How by acquiring REITS as part of your balanced stock portfolio.

A real estate investment trust (REIT) is a company that either owns, provides financing, or operates real-estate whose primary purpose is to generate consistent income.

This income is passed onto you, the investor, in the form of dividends.

Some REITS like Realty Income | Ticker: $O and Stag Industrial | Ticker: $STAG distribute monthly dividends, most others pay on a quarterly basis.

A real estate investment trust or REIT allows you to purchase shares in companies that have diverse holdings in various niches within real estate realm. To operate as a REIT, a company has to return 90% of its profits back to shareholders to receive a favorable tax treatment. 

How Does The Stock Market Classify REITS?

There are 9 classifications or industries of REITS in the stock market:

1. Diversified
2. Healthcare Facilities
3. Hotel & Motel
4. Industrial
5. Mortgage
6. Office
7. Residential
8. Retail
9. Specialty

REITS tend to be very transparent in their investment strategy, portfolio of properties, the locations of the properties, who their clients are, and the industries they serve. 

Personally, we invest in all 9 of these industries… but focus on gambling, data centers that support artificial intelligence, and cell tower technology, in particular!

Benefits of Owning A REIT

1. Dividend ratios tend to be higher than other stocks in the market since REITS are more shareholder-focused in returning profits.
2. REITS tend to perform above-average when the real estate economy is performing well amongst a backdrop of the overall economy thriving.
3. REITS tend to be a defensive buffer against recessionary pressure and/or steep declines in the overall market. Why? Because long-term contracts with tenants have not been disrupted.
4. Imagine creating a truly passive income stream without the hassle of satisfying tenants, maintenance requests, expensive repairs, and late rent!
5. A reduction in property value has no impact on the rent that is being received.
6. Yet, when rents increase, the difference is passed onto you as a higher dividend!
7. Low cost-barrier to entry.
8. 100% liquid.

Disadvantages of Owning A REIT

1. Due to the focus being on paying dividends, the share performance of a REIT is generally flat. Owning a REIT with some level of dividend and capital appreciation is a true benefit.
2. REIT dividends are taxed as ordinary income. The ordinary income tax rate is the same as an investor’s income tax rate, which is likely higher than dividend tax rates or capital gains taxes for stocks.
3. Interest Rates. If the Federal Reserve is in a period of raising interest rates, obviously this has an impact on real estate purchasing power while reducing demand for REIT properties, including clients who may be exploring refinancing.
4. Not all 9 REIT industries will afford you the same opportunity. For example, we do have some concern with the post-Covid impact to office REITS and the decline of retail REITS due the advent of online shopping and the frequency of store closures.
5. Some REIT dividends have too high of a payout as it pertains to a company’s net income. If the dividend is not sustainable, it will be reduced. A reduced dividend means a reduction to your bottom line.

In Closing

REITS are the solution for you to have direct ownership of various classes of real estate without having to acquire and manage physical assets on your own.

REITS also help to truly diversify any stock portfolio.

We recommend you also investment in more than one industry area of REITS.

Tools

There are 214 publicly-traded domestic and international REITS on Wall Street. To help you sort through this, you will need a screening tool. We use Finviz. Finviz cuts through the chatter by allowing you to sift through metrics like capitalization, share price, dividend yield, industry, performance, debt, etc… to pick the best REITS that suits your interests and investing style.

Click here to become a Finviz Elite member. My returns have far outweighed the cost!