Should You Be Investing in Real Estate Investment Trusts (REIT)?

Considering real estate investment in 2025? Real Estate Investment Trusts (REITs) offer a compelling avenue to participate in the property market without the direct responsibilities of ownership or property selection. Similar to stock investments, REITs provide accessibility, often requiring modest capital, thus opening the door for both accredited and non-accredited investors to potentially earn returns. In fact, Nareit estimates that nearly 170 million Americans, representing 50% of all households, currently benefit from REIT ownership.

Table of Contents

What is REIT?

REIT Pros

REIT Cons

Historical returns of REITs

REIT categories

5 types of REITs

How to invest in REIT

What to know about REITs before investing in 2025

REITs vs. Stocks: What’s the difference?

Tips for getting started with REIT investing

REIT FAQs | The bottom line

What is REIT?

Real Estate Investment Trusts (REITs) are investments in real estate companies that buy, hold, and usually manage commercial real estate. It's a great way to get your foot in the door investing that's traditionally reserved for accredited investors (wealthy investors).

You have many ways to invest in REITs, including publicly traded REITs and non traded REITs in a variety of industries and categories. It's crucial to remember that REITs are not without risk, so thorough research into the sponsoring company and their investments is essential. 

Benefits of REITs

REITs offer several potential advantages for individual investors:

• Low barrier to entry, especially for publicly traded REITs
• Low minimum investment requirements
• Make it easier for anyone to invest in real estate
• Offers great portfolio diversification
• You may earn dividend income
• You can invest in income producing real estate that is usually reserved for accredited or wealthy investors

REIT Drawbacks

Despite their advantages, REITs also come with certain risks and disadvantages:

• There's no guarantee you will have a positive return
• Non traded REITs can be risky because they aren't very liquid
• Some publicly traded and non traded REITs are for accredited investors only
• You have no control over the real estate properties the fund manager chooses

Historical returns of REITs

Investors commonly look at the FTSE NAREIT Equity REIT Index as a key benchmark for evaluating the performance of the U.S. real estate market.

As of November 2024, the FTSE Nareit All Equity REIT Index reported a total return of 14%. This figure significantly surpassed the index's 25-year average return of nearly 10%. While REITs didn't keep pace with the broader stock market during this period, they delivered considerably stronger returns compared to private real estate investments.

This outperformance was particularly evident through the third quarter of 2024. During this time, REITs exceeded the returns of private real estate (tracked by the NCREIF ODCE index) by over 17 percentage points. This divergence reflects the ongoing adjustment of private real estate valuations to account for the impact of higher interest rates.

(See Graph 1 illustrating the historical performance trends of REITs.)

(See Graph 2 detailing the annual capital raising activity within the U.S. REIT market.)

REIT categories

You can invest in REITs in a variety of ways, whether you want to own part of a company's equity or you'd rather be the 'lender' and invest on the debt side of REITs.

Equity REITs

Equity REITs give the real estate company and its shareholders ownership of the company. As a shareholder, you earn passive real estate income by investing in the REIT and collecting dividends based on the percentage of the real estate that you own. The REIT company, though, owns, operates, and manages the real estate. Therefore, your dividends and the success of the real estate are in the REIT company's hands.

Equity REITs are a passive investment. You get to participate in the real estate's appreciation, but you don't have to do any of the work involved in running the property.

Mortgage REITs

Mortgage REITs invest in the debt side of real estate. Mortgage REITs buy mortgage backed securities for money lent to real estate developers and builders who want to buy or build up real estate. The REIT company doesn't own the real estate, and you don't earn dividend payments from rental income. However, you may earn dividend income from monthly payments or quarterly interest payments.

Mortgage real estate investment trusts are often riskier than equity but they may be considered high dividend REITs; although that's not guaranteed.

Hybrid REITs

Hybrid REITs are the best of both worlds. The REIT owns and operates real estate (equity REITs) and invests in mortgage debt. This is an excellent way to have a diversified portfolio and take advantage of the many benefits of the real estate market.

5 types of REITs

In addition to different categories of real estate investment trusts, there are different types of REITs you can invest in too.

Mortgage REITs

Real estate companies often invest in mortgages because of the high reward. Commercial real estate is often riskier for lenders, so the interest rates paid are higher. As a real estate investor, you have the guarantee of the collateral (the commercial real estate properties) to fall back on should the tenant default.

Office REITs

REITs can invest in office buildings, owning a fraction of the building and earning dividend income on the rents paid. Office buildings are sometimes lower risk than retail buildings and provide a steady income for real estate investors.

Healthcare REITs

Healthcare REITs invest in various healthcare sites, such as hospitals and medical buildings. Since medical facilities are typically in high demand, they can be a good way to diversify a REIT portfolio.

Residential REITs

Residential REITs invest in commercial real estate that owns properties to rent out to families. Apartment buildings and hotels are two common examples. Any multi-unit building that the owners can rent out to tenants are residential opportunities for real estate investments.

Retail REITs

Retail REITs span the spectrum from freestanding stores to strip malls and large shopping malls. These are the riskiest REIT investments, but because they are income producing real estate, many investors include at least a few of these in their portfolio.

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How to invest in REIT

There are several ways to buy and sell REITs, but the easiest way is on the public stock market. These shares are listed on the stock exchange and available for retail investors to buy or sell shares during regular stock market hours.

There is also the option to buy shares of a REIT as a mutual fund or exchange traded funds if you want a more diversified investment.

The options above are all publicly traded REITs. They are listed on the stock market and registered with the SEC. Publicly traded REITs are bought and sold just as easily as shares on the stock market.

There are also options to invest in private REITs. These REITs usually aren't listed on the stock market and may or may not be registered with the SEC. Instead, you can buy shares through a private brokerage account with a broker associated with the investments.

It's always important to do your research before choosing a REIT. Know the company behind the REIT and its track record. REITs pay dividends often, but it's not a guarantee. Read the fine print and know what you're agreeing to before adding REITs to your investment portfolio.

What to know about REITs before investing in 2025

Choosing to invest in REITs can be a great way to diversify your portfolio, but here are some things you should know before choosing them.

REIT allocations

Each investor will have a different 'ideal REIT allocation.' It varies based on your risk tolerance, amount of capital to invest, and timeline. For example, publicly traded REIT stocks are more liquid and allow you to sell them easily should you need to jump out early. But, a non publicly traded REIT may not be as easy to liquidate.

Pay close attention to the fine print, know how long you must be invested, the risk involved when investing in REITs, and how well diversified your portfolio is to determine the right allocation for REIT mutual funds, stocks, and shares in your portfolio.

Assessing REIT share values

Publicly traded REITs have a market value based on the activities throughout the trading day. To value shares, companies look at the following:

• The projected growth
• Dividend yields
• The value of the real estate property
• How the property is managed and owned
• Dividend payout ratios

Investment holdings

Always find out what investment holdings a REIT has. This could include equity or debt investments, both with different risk factors. An ideal diversified portfolio would have a combination of debt and equity investments, but only you know what risks you want to take.

REIT growth factors

REIT growth factors are an important piece of the puzzle. The highest growth occurs when buildings can increase rents or have more opportunities for occupancy. Another way growth can occur is with the acquisition of more properties as long as they are income producing real estate that can offset the cost of adding to the portfolio.

REIT dividends

Not all REITs pay dividends. Always read the fine print and determine if there are REIT dividends and how often they pay them. Some companies don't pay them out but instead reinvest the dividends into the investment. If you're relying on the cash flow, make sure you know how often they might pay.

REIT fees and taxes

As with any investment, there are fees. Ask about all fees, including monthly maintenance fees, minimum balance fees, early redemption fees, and commissions. As far as taxes, dividends are taxable income. Since you pay taxes as you earn money, the dividends you earn this year will be subject to your regular tax rate. In addition, you might also owe capital gains taxes, either short-term or long-term, depending on how long you keep the investment.

Investing in REITs can be a great addition to your portfolio, but understand the fees and how they affect your taxable income before choosing them.

REITs vs. Stocks: What’s the difference?

While both REITs and traditional stocks represent ownership in a company, they operate with distinct underlying assets and often exhibit different investment characteristics. 

Investing in stocks typically means holding a share of equity in a diverse range of companies across various sectors. The performance of these stocks is driven by a multitude of factors, including company-specific earnings, industry trends, economic conditions, and market sentiment. 

REITs, on the other hand, specifically focus on real estate holdings, such as commercial properties, residential buildings, and infrastructure. Their performance is closely tied to the real estate market, interest rates, and occupancy rates. This fundamental difference in their core assets leads to varying risk and return profiles, as well as different sensitivities to macroeconomic factors.

One key distinction lies in their income generation. REITs are legally required to distribute a significant portion of their taxable income (typically 90% in the U.S.) to shareholders in the form of dividends. While some stocks also pay dividends, the primary focus for many stock investors is capital appreciation. 

Tips for getting started with REIT investing

1. Start with publicly traded REITs for liquidity and ease of access
If you're new to REITs, begin with publicly traded REITs listed on major stock exchanges. They can be bought and sold like regular stocks through a brokerage account, offering low entry.

2. Evaluate the REIT’s property focus and geographic exposure
Not all REITs are created equal. Choose a REIT in sectors you understand or have a favorable outlook for. Also, REITs concentrated in a single city or state may carry more localized risk.

3. Look beyond yield – analyze Funds From Operations (FFO)
REITs are often marketed based on their dividend yields, but that doesn’t tell the full story. Use metrics like FFO or Adjusted FFO (AFFO) instead of net income to assess real profitability. 

4. Check the payout ratio relative to AFFO, not just earnings
Since REITs pay out the majority of income to shareholders, it’s critical that the dividend is sustainable. A REIT with a payout ratio near or exceeding 100% of its AFFO may be overstretched and vulnerable to dividend cuts.

5. Read the supplemental financial disclosures, not just the annual report
Most REITs publish supplemental packages during earnings season with granular data like same-property NOI, lease expirations, occupancy trends, and cap rates. These documents provide far deeper insight into operational performance.

6. Monitor macro trends that impact underlying assets
For example, e-commerce trends affect retail REITs and remote work affects office REITs. REITs are tied to the real economy. Understanding these trends helps you position accordingly.

REIT FAQs

What is an appropriate allocation to REITs?

Every investor has a different allocation to REITs that's right for their portfolio. The right allocation for you depends on your risk tolerance, timeline, and overall financial goals. Whether you invest in publicly traded REITs or private REITs also makes a difference. Non traded REITs are less liquid. If you invest in only publicly traded REITs, you may get your money out faster in a pinch than you would with private REITs.

How does age affect the optimal REIT allocation?

The older you get (the closer you are to retirement), the more conservative you need your portfolio because there's less time for market correction. The more conservative you need your portfolio, the higher the allocation of REITs you may want to include in it.

How do I find out what companies are REITs?

The REIT directory from the National Association of REITs is a great start to help you find the top REIT companies offering both publicly listed REITs and non traded REITs.

Can you lose money on a REIT?

REITs are like any other investment. You can lose money on them. Even publicly traded equity REITs or mortgage REITs can lose money. There's no guarantee that a property will appreciate, a tenant will pay their rent, or that a company will succeed.

Are REITs safe during a recession?

Since REITs invest in real estate, they often do well during a recession because essential real estate, like apartments or healthcare facilities, tends to maintain consistent demand, which could provide steady rental income. Real estate can also act as a hedge against inflation, which may accompany economic downturns. However, it's crucial to understand that no investment is entirely recession-proof, and REIT performance can vary based on the specific properties they hold. There's no guarantee that a REIT will perform well during a recession, and like all investments, there's always a potential for losses. 

What is a paper clip REIT?

A paper clip REIT is a real estate company that works in tandem with another company, but they operate under a linked agreement. The other company may not be in real estate, but it's linked to the real estate company for operation purposes.

How can I avoid fraud when investing in REITs?

To avoid REIT fraud, always verify the REIT and its brokers' registration with regulatory bodies. Be wary of unsolicited offers and guaranteed high returns. Thoroughly research the REIT sponsor, management team, and carefully review all offering documents, ensuring you understand the investment, management fees, and risks. 

The bottom line

Investing in REITs can be a great way to get into real estate investments today. REITs generate income in the form of dividends and typically appreciate, giving investors capital gains. While there are other asset classes you can invest in, adding REITs to your portfolio is a great way to diversify your investments. Learn more by signing up and visiting our blog.