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What is a REIT and Should You Invest in REITs?

With the current housing market meltdown, it’s hard to think about investing in real estate. Moreover, the current tight credit market and lack of cash makes it even harder to buy an investment property even if you want to. This is where REIT comes in. Personally, I think it’s an attractive investment option regardless of what the market is doing short-term.

What is a REIT?

A REIT, or Real Estate Investment Trust, is a corporation that invests in real estate. To qualify as a REIT, a company must satisfy three criteria:

  1. It must invest most of its assets in real estate.
  2. Its income must come mostly from real estate.
  3. It must pay out 90% of its taxable income to shareholders.

When you invest in REIT, you are investing in a portfolio of real estate properties and/or mortgages, depending on the type of REIT you own.

Three Types of REITs

  1. Equity REITs — These REITs buy, sell, and manage real estate properties, such as apartment buildings, shopping centers, office buildings and industrial parks.  By investing in these REITs, you are making money from rental income and property value appreciation.
  2. Mortgage REITs — These REITs invest in mortgages and make money from interest payments, not on appreciation.
  3. Hybrid REITs — These REITs are combination of equity and mortgage REITs.

6 Reasons Why I Think It is Good to Own REITs

I think investing in REITs is an excellent way to diversify your investment portfolio and generate income.  Personally, I have about 10% allocated to REITs in my tax-sheltered accounts — i.e., 401k and IRA.  Here are some reasons why I think REITs are great:

  1. You get to invest in real estate without a large upfront capital.
  2. You don’t have to deal with maintenance — i.e., answer midnight phone calls to go fix the toilet.
  3. You don’t have to deal with bad tenants and worry about collecting rent.
  4. You earn regular income in the form of dividends and capital gains distributions — this is why I don’t have REITs in my taxable account.
  5. REITs add another level of diversification to your investment portfolio.
  6. Buying and selling REITs is as simple as buying and selling stocks — much easier and faster than buying and selling houses.

Here are some more articles about REIT

13 thoughts on “What is a REIT and Should You Invest in REITs?”

  1. @Eric – Yes, Vanguard has a REIT ETF calls VNQ.

    @Four Pillars — I have some VNQ and SSREX, and they are both down close to 50%. However, the income is still strong, and I think it’s a good time to start building REIT position if you don’t have one already. That said, most of my REIT is in my 401k.

  2. There are timber REITs too. They don’t quite have the same properties as the pure timber plays the big endowments make, but they have some interesting characteristics that can help a portfolio. I think the only ones are PCL, PCH and RYN.

  3. Thanks for the reply Pinyo!

    I don’t have any ETFs in my Vanguard IRA because I believe they charge a transaction fee everytime you contribute right? Since I contribute monthly (or sometimes bimonthly), does that make VNQ an unattractive investment (compared to an equivalent index fund somewhere else?)

  4. @Eric — If you are investing small amount monthly, you should look for REIT mutual fund instead, particularly the on that is no-load and no transaction fee. No load, no transaction fee mutual funds are excellent for this type of investing.

  5. Exactly what I was thinking. Thanks for the confirmation Pinyo. Your prompt replies (and great posts of course!) always keeps me coming back.

  6. @imDavidLee — REIT is not new. It has been around a long time. As for the minimum, you will have to check with your broker. You can buy as little as one share of a REIT ETF, or $100 if it’s a fund.

  7. Is it possible to setup a peer to peer lending group for investing in and lending out money for investment properties?

    i suppose it would like a REIT, right?

  8. Yes REITs can be a viable investment right now. If you see so many people not able to get Commercial Real estate mortgages, well a large group with funds (REIT) has the power to pounce on great deals.

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