Are REITs a Good Investment?

Real Estate Investment Trusts (REITs) are a popular way to invest in real estate without the responsibilities of property ownership. They allow investors to earn passive income through dividends while benefiting from property appreciation. Since REITs are publicly traded, they offer liquidity and diversification, making them accessible to a wide range of investors.

However, like any investment, REITs come with risks, including market volatility, interest rate sensitivity, and management fees. Understanding the pros and cons can help determine whether REITs align with your financial goals and investment strategy.

What Is a Real Estate Investment Trust (REIT)?

A real estate investment trust is an asset that allows an investor to invest their capital into a real estate portfolio. Real estate companies open, own, and manage REITs and operate similarly to a mutual fund. Investors will allocate capital toward the fund, and the manager of the REIT will use that capital to acquire properties (Equity REITs) or fund mortgage loans (Mortgage REITs). Many REITs pay monthly dividends, though some may pay them annually. As the REIT performs well, investors may also profit from its rising value.

There are many types of REIT investments, and a REIT will typically focus on one type of property. For example, a commercial REIT will focus on buying office spaces, retail locations, and manufacturing properties. A residential REIT may own single-family homes and multi-tenant apartment complexes. Certain real estate investment trusts may also focus on specific locations or investments with different levels of risk.

Some REITs are publicly traded and available to any investor. They may have smaller minimum investments. Private REITs, on the other hand, are only available to accredited investors and have much steeper minimum investments. 

When investing in a REIT, investors do not own any fraction of the properties held in the trust. They only own a share of the entire portfolio. However, REITs allow investors to passively generate income by investing in an actively managed fund. Their capital will be exposed to the real estate market, which can be great for generating income and diversifying your assets without the hassle of managing a property.

Historical Returns

Over the past 20 years, REITs have a track record of outperforming the U.S. stock markets. The average annual rolling return between 1990 and 2020 fluctuated mostly between 10% and 12%, whereas stocks fluctuated between 5-9% average annual rolling returns. REITs also appear less risky, with a 6% standard deviation of REIT returns over the past 20 years. The standard deviation of returns for U.S. stocks between 1990-2020 was 13.8%.

Data shows that while REIT returns can experience short-term volatility, they historically experience long-term growth. They may not be the best option for investors looking for a short-term way to grow their capital but may provide significant capital appreciation over the long term.

It’s also important to note that REITs can be split into several different sectors, including residential, retail, health care, self-storage, office, and industrial. Each sector may perform differently depending on the overarching economic environment.

Pros of Investing in REITs

There are several advantages to REIT investments, some of which are discussed below. 

• High Returns – Historically, REITs have delivered average annual returns of over 10%, helping investors grow wealth over the long term despite short-term volatility.
• Diversification of Assets – REITs provide exposure to real estate, which reacts differently to economic trends than the stock market, helping to mitigate risk during downturns.
• Accessibility & Transparency – Public REITs can be bought and sold through brokerage accounts, with some offering low investment minimums (under $100 per share), making them accessible to retail investors.
• Passive Income – REITs pay regular dividends (monthly or annually), allowing investors to earn income without active management.
• High Liquidity – Publicly traded REITs can be bought and sold easily, providing investors with quick access to cash if needed.

Cons of Investing in REITs

REITs aren’t perfect investments and have some drawbacks. Review the disadvantages of REIT investing to understand how to mitigate the associated risks.

• No Tax Advantages – REIT dividends are taxed as ordinary income, and capital gains from selling shares are also taxable, potentially increasing your tax burden.
• Interest Rate Risk – REIT values can fluctuate with interest rate changes; rising rates may increase financing costs, negatively impacting performance in a tightening economy.
• Market Risk – The real estate market is volatile, and factors like falling property values, lower rental demand, or economic downturns can reduce REIT returns.
• Lack of Control – Investors have no direct control over property selection, management decisions, or investment strategies, as REITs are managed by a professional team.
• Potentially High Fees – Some REITs charge management, sourcing, and upfront fees, which can eat into overall returns. It's essential to review a REIT's fee structure before investing.

Where to Invest

Several online platforms make REIT investing easy for beginners. These are just a few of the best platforms for investing in real estate investment trusts:

Are REITs a Good Investment?

REITs, like every asset, have advantages and disadvantages. They are subject to interest rates and market risk, but data shows strong long-term average annual returns. REIT returns may also include dividends, which can allow you to continue to grow your wealth. Plus, they are a good way to diversify your portfolio into the lucrative real estate market. Before investing in any new asset, it’s recommended to consult with an objective financial advisor. They’ll be able to provide detailed, personalized advice on whether a REIT is a good fit for your portfolio.

Frequently Asked Questions