How to Buy REITs in 2023: Ultimate Breakdown

Real estate investment trusts (REITs) offer investors the opportunity to purchase real estate shares and benefit from real estate investment passively. REITs are less volatile than the S&P 500. Since the National Association of Real Estate Investment Trusts (Nareit) started tracking infrastructure and data center REITs in 2012 and 2015, they have outperformed the S&P 500. Self-storage REITs showed annualized returns of 18.8% from 1994 to 2021. Those are strong returns for investors. Read on to learn how to buy REITs, including diverse REIT opportunities and their pros and cons. 

What is a REIT?

A REIT owns, operates, buys and sells income-producing real estate. REITs may choose to focus on one type of real estate like office space, commercial real estate, hotels, apartment buildings, hospitals or shopping centers. Some REITs choose a diverse approach; others focus on financing real estate.

REITs must meet a number of requirements to qualify. Most notably for investors, REITs must pay 90% of their annual taxable income as dividends to shareholders. REITs are traded on major stock exchanges, making them liquid real estate investments that can easily be bought and sold. 

Are REITs a Solid Investment?

Yes, well-managed REITs can be a solid investment. The facts above indicate that REITs offer investors stable returns and strong historical performance. A well-managed REIT, like other investments, is diversified. In the case of REITs, look for REITs diversified for property type and geographic risk. 

Investing in REITs is an opportunity to diversify your portfolio outside of traditional stocks and bonds. With REIT, you gain real estate market stability without the time and capital investment required for other forms of real estate investment. In addition, REITs attract investors for their strong dividends and long-term capital appreciation that can lead to portfolio growth.

Types of REITs

You can choose from a diverse range of REITs. Each offers some pros and cons. Here's what to know to make informed decisions about how to buy REITs for your portfolio. 

Equity REITs

These REITs invest in and own physical properties, generating revenue from rents. Unlike other REITs, equity REITs own and operate properties. These REITs primarily generate revenue from rental income. Investing in equity REITs is a way to benefit from the rental property market without purchasing a property. 

Mortgage REITs

Mortgage REITs provide financing for real estate by lending money or purchasing existing mortgages. Mortgage REITs purchase or originate mortgages and mortgage-backed securities. These REITs earn income from the interest paid on those assets.

Hybrid REITs

As the name suggests, hybrid REITs combine elements of both equity and mortgage REITs. When you invest in hybrid REITs, you're investing in a combination of equity rental properties and mortgage assets like loans or mortgage-backed securities.

Public vs. Private REITs

Public REITs are traded on stock exchanges, while private REITs are not publicly traded. Public REITs are easy to sell through a brokerage. Private REITs are exempt from SEC registration. Private REITs generally are generally only sold to institutional investors.

How to Buy REITs 

If you're ready to purchase REITs, you must complete a few simple steps. Here's how to buy REITs. 

Step 1: Researching and Selecting REITs

Before buying REITs, conduct thorough research to identify the best investment opportunities. Like any investment, research is essential for success. Consider factors such as:

• Property type: Determine the type of real estate you want to invest in, such as commercial, residential or industrial.
• Performance history: Analyze the REIT's historical performance, dividend yield and growth potential.
• Management team: Assess the expertise and experience of the management team responsible for running the REIT.
• Economic conditions: Consider the current economic conditions and how they may impact the real estate market.

Step 2: Opening a Brokerage Account

The second step in how to buy REITs is to open a brokerage account if you don't already have one. Choose a reputable and reliable brokerage platform that offers a wide range of investment options. Ensure that the brokerage account supports the purchase of REITs.

Step 3: Funding Your Account

Once you have a brokerage account, fund it with the amount you wish to invest in REITs. You can transfer funds from your bank account to your brokerage account securely.

Step 4: Placing an Order

With your account funded, search for the REITs you wish to invest in. Place a buy order for the desired number of shares. Pay attention to the current market price and transaction fees.

Step 5: Monitoring Your Investment

After purchasing REITs, monitor your investment regularly. Stay informed about the performance of the REIT, any updates from the management team and market trends.

How are REITs taxed?

REITs are usually taxed as ordinary income and reported on your individual income tax return. You may need to pay a separate 3.8% surtax on investment income. Speak with a certified public accountant (CPA) or tax adviser to understand your tax situation's implications. 

Risks Associated with Buying REITs

REITs, like all investment products, carry risk. Risks specific to REITs include fluctuations in real estate values, changes in interest rates and economic downturns that may affect property demand. Look at a REIT's holdings and then consider risks such as:

• Climate risk: The risk of a REIT's income failing from natural disasters. This is particularly a concern in hurricane- or fire-prone areas for properties like resort REITs.
• Interest rate risk: Real estate is generally more sensitive to interest rates and can affect dividends and REIT performance.
• Economic risks: The risk of overall low performance from larger national or global economic factors.
• Market risks: Changes in the real estate market can lead to higher or lower overall REIT valuation and performance, leading to losses if not properly managed. 

Summary of How to Buy REITs

You can purchase domestic or international REITs. How to buy REITs in the U.S. is simple, as most REITs are publicly traded. You need a brokerage account, and then the process for how to buy REITs stock is the same as other stocks. 

Regardless of the REITs you choose, remember to diversify investments across REITs, asset classes and investment types. For other real estate investments, consider real estate crowdfunding, buying a rental property, real estate wholesaling or weighing REITs vs. rental properties.

Frequently Asked Questions