Here are five excellent ways for investors of all experience levels to add real estate to their portfolios.
Real estate investment trusts, or REITs, can not only be
excellent income investments but also have the potential for massive long-term
returns. Unfortunately, this potentially lucrative sector of the stock market
isn't well-understood by many investors.
With that in mind, here's a rundown of the basics of REIT
investing as well as five excellent top-quality REIT stocks to put on your
radar now.
What is a REIT?
A REIT (pronounced "reet"), or real estate
investment trust, is a type of investment company that buys real estate assets.
A real estate investment trust works somewhat like a mutual fund or ETF in the
sense that while mutual funds pool investors money to buy stocks, bonds, or
commodities, REITs pool investors money to buy commercial properties or other
real estate assets.
REITs were created to allow everyday investors to capitalize
on real estate opportunities that had historically only been available to the
rich. For example, few people have hundreds of millions of dollars to build a
high-rise apartment building in a major city, but anyone who can afford one
share of an apartment REIT can now invest in properties like these.
The basic concept of a REIT is that as the underlying assets
generate income, this income will be (mostly) passed to shareholders in the
form of dividends. In addition, as real estate values tend to increase over
time, property-owning REITs also grow their intrinsic value over time. Of
course, there are other value-creating tactics REITs can use, such as
developing properties from the ground-up, using leverage to boost returns, and
more. You can read my complete guide to REIT investing if you want a more
in-depth look at how these investment vehicles work, but we'll cover the major
points in this article before we dive into specific REITs to invest in.
In order to qualify as a REIT, a company needs to meet a few
specific requirements. First and foremost, it must invest at least 75% of its
taxable assets in real estate and must pay out 90% or more of its taxable
income to shareholders. It also must have at least 100 shareholders, and no
more than 50% of a REIT's shares can be held by five or fewer individuals.
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