REIT Stocks: The Easy Real Estate Investment That Pays

Did you know you can invest in real estate without actually buying real estate? You might be like me, looking longingly at the real estate market wishing you had enough to buy a house but balking at housing affordability right now. Or you might wish you had enough money to rent out multi-family properties or even commercial real estate (fancy!) Or maybe the idea of investing in real estate sounds good if it didn’t involve nearly so much work. If you are interested in investing in real estate but don’t want to or can’t buy investment properties, you might consider investing in Real Estate Investment Trusts or REIT Stocks.

Real Estate Investment Trusts, commonly known as REITs, have become pretty popular in recent years. Compared to other financial products, they have a number of advantages. One of the biggest ones being that, by law, they have to pay out 90% of their income in dividends. Given that, REITs offer an opportunity to earn passive income from real estate and diversify your portfolio. Plus, there are a variety of types of REITs that range in their risk level. So whether you are pretty risk averse (like me) or open to taking on more risk, you can probably find a REIT that will help you meet those adulting financial goals you have.

 In today’s post, I’ll delve into what REITs are, how you can make money from them, their pros and cons, how to find a good REIT for you, and popular REITs that pay monthly dividends.

Table of Contents

What Are REITs?

A REIT is a company that owns, operates, or finances income-producing real estate assets. These real estate assets can range from multi-family homes to convenience stores to factories. 

To become a REIT, the company has an initial public offering (IPO) through which they get a pool of investment money. They then use that investment money to invest in real estate and then pay out the returns to investors. REITs were created in the United States in 1960 when Congress passed the REIT Act, allowing individuals to invest in large-scale, income-producing real estate without having to purchase, manage, or finance properties themselves.

There are a few types of REITs. 

Equity REITs

The first type of REIT is the most conventional kind. It’s called an equity REIT. Equity REITs actually own properties. These can range from pretty conventional real estate assets like apartment complexes, single family homes, and condos, to real estate assets that you might not think about but that can earn tons of money. For example, ski resorts, movie theaters, senior housing, commercial properties like office buildings, and even amusement parks. 

Each of these types of subgroups of equity REITs have difference levels of risk, return, and performance. For example, REITs in the healthcare industry have tended to perform especially well in recent years. In contrast, many REITs that specialize in office space have been hardcore struggling this year. Those of us who love work from home might not feel too sad about that. You can choose what kind of equity REIT best meets your needs and I have more guidance on that below.

Mortgage REITs

In contrast, mortgage REITs or mREITs are investments in mortgages and agency mortgage-backed securities. These mortgages may be backed by federal lenders like Fannie Mae, Freddie Mac, or Ginnie Mae, but they don’t have to be. mREITs aren’t based in owning property, just in financing those who do. mREITs are an important source of financing for people who want to buy homes.

However, mREITs are more volatile than equity REITs so this may be a less appealing option if you’re more risk averse.

Hybrid REITs

Hybrid REITs both own real estate assets and invest in mortgage loans. So they’re just a mix of the two types described above. Generally they specialize in owning and financing specific kinds of properties, like described above for equity REITs.

EREIT vs. REIT

Finally, there are eREITs. eREITs were created relatively recently by the financial technology (fintech) company Fundrise. Fundrise uses their smart technology to manage properties and assets and, in turn, individual investors can buy shares of their investments. eREITs take some of the guesswork out of investing in real estate because Fundrise develops a strong portfolio of real estate investments for you. They have different portfolios of investments depending on your goals–like appreciation or having a balanced portfolio.

However, it’s important to mention that because Fundrise is a private company, you can’t trade your shares on the New York stock exchange. Rather, you earn quarterly dividend payments and can redeem shares on a quarterly basis from the company. Moreover, because these are actively managed portfolios, their fees tend to be higher than other kinds of financial products.

eREITs can be a good option for some investors. However, given the relative newness of eREITs, those looking to take the guesswork out of investing in REITs might feel a little safer with REIT ETFs or mutual funds offered through brokerage companies like Vanguard and Fidelity. These ETFs and mutual funds also have built in diversification, but may have fewer logistical hurdles and potentially lower fees.

Sub-Groups of REITs

As mentioned above, you can invest in an equity or mortgage REIT that specializes in specific types of real estate. For example, EPR Properties is a REIT that invests in entertainment venues like amusement parks, movie theaters, and ski resorts. Likewise, you can invest in REITs that focus on office spaces or industrial properties like factories, distribution centers, and warehouses, Stag Industrial and Gladstone Commercial are two prominent REITs in these areas. LTC Properties is a REIT that invests in senior housing. It’s a hybrid REIT. And then there’s Diversified Healthcare Trust, the highest performing REIT of this past year. They own senior living centers, medical offices, wellness centers, and other places that have a healthcare focus.

However, regardless of the type, REITs are designed to provide investors with a way to invest in real estate without the complications of actually owning property. Similar to regular stocks, when you invest in an indiviudal REIT, you are buying shares in a company that manages a portfolio of properties.

How Do You Make Money from REITs?

Investors can make money from REITs in several ways:

Dividend Income 

One of the main ways of earning income from REITs is dividend income. Specifically, REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. Most REITs pay out monthly dividends. Consequently, you can get potentially high dividend yields from REITs and consistent passive, liquid income each month, quarter, or year. This makes them a great option for income investors (i.e. people who use their investments for consistent cash flow rather than stock gains).

Indeed, average dividend yields for REIT stocks are 4.3% (dividend yields are the percentage of the stock price paid out in dividends). Some subgroups of REITs, like healthcare REITs, consistently pay more, making them one of the best monthly dividend stocks out there in terms of the size of their monthly payments. As a comparison, the average dividend yield for stocks on the S&P500 is 2-5% depending on market conditions.

Moreover, while many dividend-paying stocks are very expensive and buying real estate is obviously super expensive, REITs are often accessible to small investors. They therefore make it possible for individuals to invest in high-quality, income-producing real estate assets.

Capital Appreciation

Additionally, the stock price of your REIT hopefully goes up over time. This can occur because the underlying real estate properties appreciate in value or because there is a greater demand for the REITs themselves. If the share price goes up, you can earn capital gains when you sell your REITs, just like with normal stocks. Your total return from a REIT therefore includes your dividends, as well as capital gains from appreciation.

Over the long term, REITs have performed comparatively to the overall stock market. Indeed, from 1972-2022, REITs returned, on average 11.26% (not adjusted for inflation). The S&P500 did only slightly better, with an average annual growth rate of 11.98%. That being said, you can invest in sub-groups of REITs that have even higher average returns. For example, the self-storage, infrastructure, and data center REIT subgroups have outperformed the S&P500, on average. 

Portfolio Diversification

One of the nice things about REITs is that they don’t consistently track the regular stock market. Consequently, adding REITs to your investment funds can be a great way of developing a diversified portfolio while maintaining pretty high yields.

Liquidity

Traditional real estate is very illiquid. You can’t just sell your house or part of your house on a whim to get money. This is where stocks can be so advantageous. You can easily sell stocks and earn money in a relatively short period. Because REIT shares are typically traded on major stock exchanges, they also give investors more liquidity than conventional real estate investments. That being said, private REITs (like the eREITs mentioned above) and non-traded REITs are less liquid. They generally have restrictions on when you can redeem them. Keep this in mind when deciding on a REIT to invest in!  

Cons of Investing in REITs

So we’ve gone over how you make money from REITs, which also happen to cover the pros of investing in REITs. What are the risks of this type of investment?

Interest Rate Sensitivity

REITs can be sensitive to changes in interest rates. We all know that the cost of housing skyrocketed when interest rates went up over the past year and a half (as of the time of this writing). Because REITs involve purchasing and managing real estate, they too are subject to those interest rate fluctuations. When interest rates rise, REITs’ profitability may go down, influencing your returns.

Market Volatility

Like all stocks, the share prices of REITs can be subject to market volatility. During economic downturns or market corrections, REIT prices may decline. For example, during the 2008 housing and financial crisis, REITs tanked, losing 60% of their value at one point. REITs eventually recovered and, indeed, have tended to be less volatile than conventional stocks since that time. However, the risk of market volatility is always present and there is a lot going on in the housing market right now with super high interest rates, lots of building, but also crazy high demand.

Risk of Managerial Incompetence and High Debt

The success of a REIT largely depends on the competency of its management team. Poor management decisions can negatively affect the performance of the REIT. Similar to if you were investing in a single company, you’ll want to check up on the health of the management company before purchasing a REIT. Moreover, because REITs have to pay out so much in dividends, they can have really high debt. This could put the company that owns REITs at risk. As with investigating the managerial team, you’ll want to compare the levels of debt of different REITs to pick one that looks healthy.

Tax Complexity

REITs add an extra layer of tax complexity because you generally have to pay taxes on your dividend income. You may find it helpful to work with a tax professional if you purchase REITs. Or you can sidestep this issue by adding REITs to a tax advantaged retirement account like a traditional IRA.

How Do You Find a Good REIT?

If you’re interested in investing in REITs, how do you figure out the right one to invest in? 

The Simplest Option

The simplest option is to purchase a REIT ETF or mutual fund through your traditional brokerage company like  Vanguard and Fidelity. These REITs will be diversified and vetted for you. Consequently, you don’t have to put in the same level of research you would if you were investing in individual REITs.

ETFs generally have lower fees and better returns than mutual funds, so many financial advisors recommend ETFs over mutual funds.

However, if you want to invest in individual REITs, you should go through the following steps: 

1. Assess Which REIT Aligns With Your Goals/Risk Tolerance

Investing in an individual REIT is like investing in an individual company. You want to do your due diligence before jumping in. Specifically, you’ll want to consider:

• Property Type: Do you want to invest in residential real estate? Entertainment? Commercial or industrial? Healthcare? There are tons of options and each come with different levels of risk and returns. Remember that the higher the risk of an investment, the higher the possible returns tend to be and vice versa. Greater risk is indicated by more volatility in the stock over time.
• Location: We all know property values vary widely across the United States and the world. Places where there is high demand for real estate (indicated by a high occupancy rate and low vacancy rate) will tend to have more competitive and high-performing real estate markets. You might consider diversifying your REIT investments across locations (and property types!) to help you mitigate risk.
• Management Quality: With REITs, you’re not just betting on the real estate market, you’re betting on the quality of the team managing the REIT. Make sure you look into their company’s track record and ensure they’ve stayed out of the news. You can also buy REITs through some traditional financial companies like Vanguard and Fidelity. 

2. Look at Financial Metrics

When doing research on REITs, there are a few things you should look out for.

• Funds from Operations (FFO): First, FFO is a key performance metric for REITs. To oversimplify things just a little, it measures the money earned minus money lost for a REIT. It offers some insight into cash flows for the company. Many companies report the FFO per share. You’re looking for a higher cash flow per share to indicate better financial performance. Moreover, you ideally want to see payout ratios of 70-80%. Payout ratios refer to the percentage of FFO that gets paid out as a dividend. If that ratio is too close to 100%, it signals that dividends will likely go down soon and/or that the company is over-leveraged.
• Dividend Frequency, Yield, and Rate:
  • Do you prefer to get dividends on a monthly basis? Some REITs pay out on a quarterly or annual basis.
  • Also check their dividend yield (the percentage of a company’s share price that it pays out in dividends).
  • And check their dividend rate (basically the amount of the dividend per share you buy).
  • Use these to determine whether the size/frequency of the dividends is worth it to you.  
• Debt Levels: Assess the REIT’s debt-to-equity ratio to get a sense of their financial health. You ideally want to invest in a company with comparatively less debt. Keep in mind though that REITs, in general, tend to have pretty high debt so you’re starting with a pretty high debt bar.

3. Review Past Performance

Finally, it’s helpful to examine the REIT’s historical performance. For example, you want to get a sense of the company’s dividend history and share price trends. This can provide insights into its stability over time and growth potential. After all you don’t want to invest in a REIT only to have its dividends and/or share price tank.

REIT Stocks That Pay Monthly Dividends

The following stocks pay relatively high monthly dividends and are recommended by a wide variety of financial analysts for their stability, steady growth, and returns.

Company	Type	Industry	Div. Yield
Apple Hospitality (APLE)	Equity	Hotels	5.9% ($0.08 dividend/share)
AGNC Investment Corp (AGNC)	Mortgage	High-quality mortgage-backed securities	14.22% ($0.12 dividend/share)
EPR Properties (EPR)	Equity	Entertainment (i.e. experiential real estate)	7.31% ($0.275 dividend/share)
LTC Properties (LTC)	Equity	Senior housing and long-term care	6.68% ($0.19 dividend/share)
Realty Income (O)	Equity	Commercial property	5% ($0.255 dividend/share)
Stag Industrial (STAG)	Equity	Industrial	3.87% ($0.1225 dividend/share)

Final Thoughts

Real Estate Investment Trusts (REITs) have grown in popularity in recent years because they allow individuals to invest in real estate without the hassles (and costs!) of actually owning real estate. Plus, they can provide consistent monthly income (or quarterly or annual) depending on the specific REIT. And they let you diversify your investment portfolio while still getting pretty high returns. Consequently, they can be a versatile and useful investment option for a wide range of investors.

That being said, it’s important to keep in mind that REITs have risks. If you’re investing in individual companies, you want to research the health of the company you’re investing in, financial metrics, and past performance, and whether the type of REIT aligns with your goals. If you’re more risk averse, you’ll want to pick something with less volatility. Alternatively, you can invest in a diversified group of REITs through ETFs or mutual funds. However, even then, you’ll want to be aware that REITs may go up and down (like regular stocks), particularly in high interest rate environments.

As always, it’s important to consult with a certified financial planner before making any decisions. And remember that I am not a financial professional! This advice is only for informational and entertainment purposes.

All in all, REITs are a pretty cool investing option for those who would love to invest in real estate but don’t have the time, resources, or desire to do so by purchasing property. If your adulting plan involves real estate investments but you can’t afford to buy anything, this could be an interesting option for you. Do you have more questions about REITs? Let me know in the comments! And if you enjoyed this article, please consider liking, subscribing, or sharing. It’s always a big help!

Interested in related content? Check out my posts on house hacking, the numbers you need to know as a first-time home buyer, and how to get started investing.