Table Of Content
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate across various sectors like residential, commercial, or industrial properties.
Here’s a step-by-step guide to help you get started with REIT investing.
1. Understand the Types of REITs Available
Before investing, it's important to recognize that not all REITs are the same. There are three main types:
Equity REITs: Own and operate properties (e.g., shopping malls, apartments).
Mortgage REITs (mREITs): Provide financing for real estate by purchasing or originating mortgages.
Hybrid REITs: Combine both ownership and lending activities.
Each type has different risk and return profiles.
REIT Type | Description | Best For |
|---|---|---|
Equity REITs | Own and manage income-producing properties | Investors seeking long-term growth and income |
Mortgage REITs | Invest in real estate debt and mortgages | Yield-focused investors comfortable with risk |
Hybrid REITs | Combine equity and mortgage REIT features | Investors wanting diversified exposure |
For example, Equity REITs often generate income through rent and tend to perform better when property values rise. Mortgage REITs, however, are more sensitive to interest rates and can be more volatile.
A retiree looking for steady income might prefer Equity REITs, while an investor with higher risk tolerance may explore mREITs for potentially higher yields.
- The Smart Investor Tip
If you’re unsure where to start, Equity REITs are generally more stable and easier to understand than Mortgage or Hybrid REITs.
2. Choose How You Want to Invest in REITs
There are multiple ways to invest in REITs, each with its pros and cons:
Publicly traded REITs: Bought and sold like stocks via a brokerage account.
REIT mutual funds or ETFs: Offer diversified exposure to multiple REITs.
Private REITs: Not traded on public exchanges; often require higher minimum investments and carry more risk.
Investment Type | Access Method | Pros | Cons |
|---|---|---|---|
Publicly Traded REITs | Online brokerage platforms | Liquidity, transparency, lower entry barrier | Subject to market volatility |
REIT ETFs or Mutual Funds | Fund platforms (e.g., Vanguard, Fidelity) | Diversification, easy portfolio allocation | May carry management fees |
Private REITs | Advisors or direct platforms | Potentially higher yields, niche opportunities | Less liquid, less regulated |
For most retail investors, publicly traded REITs and ETFs are the most accessible and transparent.
For example, someone using a platform like Fidelity or Vanguard can easily invest in a REIT ETF such as Vanguard Real Estate ETF (VNQ) for broad market exposure.
- The Smart Investor Tip
Start with a REIT ETF if you’re new to the space—it gives you instant diversification without having to analyze individual REITs.
3. Evaluate REIT Fundamentals and Performance Metrics
Just like any investment, research is key. Focus on metrics such as:
Funds from Operations (FFO): A better measure than earnings for REIT profitability.
Dividend yield: Shows how much income you're earning relative to price.
Occupancy rate and lease terms: Indicate property stability and future cash flow.
For example, if you're comparing two REITs—one with a higher dividend yield but lower occupancy, and another with stable occupancy and moderate yield—you'll want to consider your own goals.
An income-focused investor may prioritize yield, while a long-term growth investor may value stability.
4. Use a Brokerage or Investing Platform
To buy REITs, you’ll need access to a brokerage account. Platforms like Charles Schwab, E*TRADE, or Fidelity allow users to invest in individual REIT stocks, REIT ETFs, or mutual funds. Here’s what to look for:
Low fees or commission-free trading
Access to REIT-focused research tools
Fractional shares (if you want to invest small amounts)
A beginner investor may start with a REIT ETF using a robo-advisor like Betterment or Wealthfront, which handles diversification and rebalancing.
On the other hand, a hands-on investor may choose individual REITs using research filters.
Broker | Annual Fees | Best For |
|---|---|---|
E-Trade | 0% – 0.35%
0% on stocks and ETFs in self directed brokrage, 0.35% for Core Portfolio Robo Advisor
| Options & Futures Trading |
Interactive Brokers | 0% – 0.75%
$0 online commission on U.S. listed stocks and ETFs, Options: $0.15 – $0.65 per-contract, Futures: $0.25 – $0.85 per-contract. For Interactive Advisors: asset-based management fees of 0.10% to 0.75% | Professional Trading Tools |
Fidelity | 0% – 1.04%
Fidelity Go® Robo advisor: $0: under $25,000, 0.35%/yr: $25,000 and above
Fidelity® Wealth Management dedicated advisor: 0.50%–1.50%
Fidelity Private Wealth Management® advisor-led team: 0.20%–1.04%
| Retirement Account Investing |
Vanguard | Up to 0.30%
$0 online commission on U.S. listed stocks, mutual funds and ETFs, options: $0.65 per-contract, Vanguard Digital Advisor – 0.015%, Vanguard Personal Advisor: 0.03%, Vanguard Personal Advisor Select: up to 0.03%, Vanguard Wealth Management: up to 0.03% | Low-Cost ETF Investors |
J.P. Morgan Self Investing | $0
$0 online commission on U.S. listed stocks and ETFs and $0.65 per-contract | Chase Bank Customers |
Charles Schwab | Up to 0.80%
$0 online commission on U.S. listed stocks, mutual funds and ETFs, options: $0.65 per-contract, Schwab Intelligent Portfolio – 0%, Schwab Intelligent Portfolios Premium – One-time planning fee: $300 + Monthly advisory fee: $30, Schwab Wealth Advisory: up to 0.80% | Advanced Trading Tools |
Merrill Edge | 0.45% – 0.85%
0.45% for Merrill Robo Advisor (Guided Investing), 0.85% for Investing With An Advisor | Bank of America Clients |
5. Monitor and Adjust Your Portfolio Over Time
REITs can be a long-term income-generating asset, but they’re still subject to market changes. Regularly check:
Dividend changes: A reduction might signal operational issues.
Interest rate movements: Higher rates can hurt REIT prices by raising borrowing costs.
Sector performance: For example, office REITs may lag in a remote-work economy.
Let’s say you initially invested in retail REITs, but now e-commerce is taking a toll on brick-and-mortar tenants.
In that case, you may want to shift your allocation toward industrial or logistics REITs, which benefit from online shopping trends.
How to Pick the Best REIT
Choosing the best REIT depends on investment goals, risk tolerance, and market outlook.
It’s essential to look beyond dividend yield and understand what drives the REIT’s performance. Here’s how to narrow down your options:
Know the Sector: REITs specialize in sectors like residential, industrial, retail, data centers, and healthcare. For instance, industrial REITs such as Prologis (PLD) may perform well in an e-commerce-driven economy, while healthcare REITs benefit from aging populations.
Review Management Quality: A well-managed REIT typically maintains high occupancy, consistent dividends, and responsible debt levels. Check leadership history and performance during market downturns.
Check the Dividend History: A strong REIT doesn’t just offer high yield—it also shows consistent or growing payouts over time.
Look at Valuation: Compare the REIT’s price-to-FFO ratio with peers. If it's significantly higher, it may be overvalued.
How to Analyze REIT Performance & Risks Before Investing
Before putting your money into a REIT, take time to assess both performance potential and risks:
Funds From Operations (FFO): This key metric adjusts net income to reflect real estate cash flows. A REIT with stable or growing FFO signals reliable income.
Leverage Levels: High debt can limit flexibility. Look for a moderate debt-to-equity ratio, especially in rising interest rate environments.
Portfolio Diversification: A REIT focused on just one region or tenant may be riskier. For example, office REITs tied to one city may underperform if remote work expands.
Tenant Quality & Lease Lengths: Reliable tenants and long-term leases reduce vacancy risk. For example, a retail REIT with top brands as tenants is more stable than one reliant on local shops.
Analyzing these factors helps you choose REITs that can deliver stable income and weather market fluctuations.
FAQ
Yes, many retirement accounts allow REIT investments, especially through REIT mutual funds or ETFs. This helps investors grow tax-advantaged income and diversify beyond stocks and bonds.
REITs are beginner-friendly because they offer real estate exposure without owning physical property. Many new investors choose REIT ETFs for instant diversification and passive income.
Most REITs pay dividends quarterly, but some, like Realty Income (O), offer monthly payouts. Always check the REIT’s dividend schedule before investing.
Yes, REITs can decline in a recession, especially if their sector (like office or retail) is economically sensitive. However, some REITs in sectors like healthcare or housing may hold up better during downturns.
REIT dividends are generally taxed as ordinary income, not qualified dividends. This means they may be taxed at a higher rate unless held in a tax-advantaged account.
Yes, many U.S. REITs are accessible to foreign investors through global brokerage accounts. However, international investors may face different tax withholding rules.
REIT funds provide broad exposure and reduce risk through diversification, while individual REITs offer more control and potential for higher returns. The best choice depends on your risk tolerance and investing knowledge.
Chasing high dividend yields without checking sustainability, ignoring debt levels, and failing to diversify across REIT sectors are all common pitfalls. It’s important to balance income with risk management.
Some REITs, like those in residential or industrial sectors, can help protect against inflation because they can increase rents over time. However, not all REITs adjust quickly to inflation
Absolutely—many investors include REITs to boost dividend income because they’re required to distribute most of their earnings. For example, retirees often rely on REITs for steady cash flow.
Healthcare REITs often remain resilient during downturns because demand for medical services is stable. But individual performance still depends on tenant quality and property type.
