Real estate investment trusts (REITs) refer to companies that own and operate real estates in order to generate income. Properties included in a REIT portfolio may include apartments, health care facilities, hotels, infrastructure (for instance fiber cables, cell towers, and energy pipelines) office buildings, retail centers, self-storage, timberland, and warehouses.
A REITs was established by the U.S. Congress as an amendment to the Cigar Excise Tax Extension of 1960; of which the provision allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties.
In a previous article, Investingport discussed REITs, the types REITs, as well as their advantages and disadvantages. In this article, we will be looking at how to invest in REITs.
Investing in REITs
REITs are necessary when considering any fixed-income portfolio, as they serve as a means of diversification, generating returns, as well as lower risks. They also generate dividend income and capital appreciation, making them a counterbalance to stocks, bonds, and cash.
An investor can invest in publicly-traded REITs, including REIT mutual funds and REIT exchange-traded funds (ETFs), by acquiring shares through a broker. Shares of a non-traded REIT can be acquired through a broker or financial advisor who participates in the non-traded REIT’s offering.
It is reported that there are more than 225 publicly-traded REITs in the U.S. Therefore, as an investor, maximum research is required before making investments in REITs. Things to research include the management team of the REIT, its history, performance and the type of properties traded and how hot and viable the market is. The earnings per share (EPS) and current dividend yields are very important factors to be considered.
Sectors of REITs to consider investing in
1. Healthcare REITs
Currently, the cost of healthcare has been on a steady rise. Growth has been observed in medical buildings, outpatient care centers, retirement communities, and eldercare facilities. It is advisable for investors to look out for healthcare REITs. HCP Inc. (HCP) is a healthcare REITs that have a market capitalization of about $15 billion. HCP Inc. offered a dividend yield of 4.32% in the first quarter of 2019. Its investment portfolio focuses on life sciences facilities—diagnostic centers, labs, genomics, and more.
2. Residential REITs
These REITs own and operate family rental apartment buildings and manufactured housing. In investing in this kind of REIT, the population of the area, job growth as well as affordability should be considered. Residential REITs tend to focus on urban centers. With an increased demand for accommodation, it is expected that Residential REITs will perform well.
3. Office REITs
These REITs invest in office buildings and receive rental income from tenants who have signed up for long term leases. Before investing in office REITs consider the state of the economy, unemployment rate, vacancy rates and capital required for acquisition. It is advisable to invest in office REITs that are in economic strongholds.
4. Mortgage REITs
About 10% of REITs are more in mortgage REITs than the usual REITs. Fannie Mae and Freddie Mac are government-sponsored organizations that mortgages in the secondary market. These types of REITs get their capital from secured and unsecured debt offerings. Most mortgage REITs trade at a discount to net asset value per share, thus it is important to find a good one.
Tips to keep in mind when venturing into REITs
Even though REITs offer high dividend yields with moderate capital appreciation, invest in REITs with a good historical track record.
You could buy a mutual fund or ETF that make investments in REITs.
Invest in companies that have a good management and have been around for some time.
Invest in REITs that have large amount of properties and responsible tenants.
Investingport does now own any REIT stocks at this time.