Why reits are good investments

In addition to the historical investment performance and portfolio diversification benefits available from investing in REITs , REITs offer several advantages typically not found in companies across other industries. These benefits are part of the reason that REITs have become increasingly popular with investors over the past several decades. REITs' reliable income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods of time, or from interest payments from the financing of those properties.

Most REITs operate along a straightforward and easily understandable business model: By leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. When reporting financial results, REITs, like other public companies, must report earnings per share based on net income as defined by generally accepted accounting principles GAAP.

Since REITs buy real estate, you may see higher levels of debt than for other types of companies. Be sure to compare a REIT's debt level to industry averages or debt ratios for competitors. Capital market conditions are also important, namely the institutional demand for REIT equities.

In the short run , this demand can overwhelm fundamentals. For example, REIT stocks did quite well in and the first half of despite lackluster fundamentals, because money was flowing into the entire asset class. At the individual REIT level, you want to see strong prospects for growth in revenue, such as rental income, related service income, and FFO. You want to see if the REIT has a unique strategy for improving occupancy and raising its rents.

REITs typically seek growth through acquisitions and further aim to realize economies of scale by assimilating inefficiently run properties. Economies of scale would be realized by a reduction in operating expenses as a percentage of revenue. But acquisitions are a double-edged sword. As mortgage debt plays a big role in equity value, it is worth looking at the balance sheet.

Some recommend looking at leverage , such as the debt-to-equity ratio. But in practice, it is difficult to tell when leverage has become excessive. It is more important to weigh the proportion of fixed versus floating-rate debt. In the current low-interest-rate environment , a REIT that uses only floating-rate debt will be hurt if interest rates rise.

In general, REIT dividends are taxed as ordinary income. However, there may be some good news here. Stable income that can exceed Treasury yields combines with price volatility to offer a total return potential that rivals small-capitalization stocks.

Analyzing a REIT requires investors to understand the accounting distortions caused by depreciation and pay careful attention to macroeconomic influences. Legal Information Institute. Definition of Real Estate Investment Trust. Internal Revenue Service. Real Estate Investing. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Private REITs may not be for everyone, but there can be a lot of upside to this type of investment.

Just make sure you understand the good and the bad before investing. A DownREIT can allow property investors to defer capital gains taxes while still enjoying the benefits of their properties.

Many factors come into play, including risk tolerance, timeline, and your short- and long-term goals. The 10 biggest REITs have a lot of financial power and opportunity for growth. Read on to find the best large real estate investment trusts for you. Retirement accounts are an excellent choice for holding REIT investments. But how do you decide whether to buy in a traditional or Roth IRA? REIT dividends aren't like other dividends. Find out what they are, why they have such high dividend yields, whether their dividends are qualified, and much more.

Advertiser Disclosure We do receive compensation from some affiliate partners whose offers appear here. Millionacres Logo. By comparison, a house is a comparatively illiquid asset whose investment risk is not diversified, but rather highly concentrated. REITs are real estate working for you. REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs.

Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. Nareit serves as the worldwide representative voice for REITs and real estate companies with an interest in U. You Might Also Like