Investors, Including Homeowners

Real estate investment trusts (REITs) own and manage income-generating assets. They are investment vehicles that give investors convenient exposure to the real estate industry. They pool funds from investors and then use this capital to acquire and manage properties or finance property investments. Through them, people have the opportunity to buy into real estate assets with much smaller amounts of cash than they would need to purchase entire properties.

There are different types of REITs. The differences arise primarily from the types of properties that the REITs invest in. For example, retail REITs own and operate shopping malls and retail properties, residential REITS own and operate multi-family properties, and office REITs own and operate office buildings. There are also healthcare REITs that invest in hospitals, nursing facilities, and retirement homes. Mortgage REITs buy mortgages as opposed to real estate properties themselves.

Since Congress established REITs in 1960, the investment vehicles have grown in popularity. As of 2021, about 145 million Americans own REITs, mostly through their retirement savings and investments like mutual funds and exchange traded funds. The REITs themselves own more than 516,000 assets across the country valued at over $3 trillion. Publicly traded REITs own about $2.5 trillion worth of assets, and their market capitalization exceeds $1.3 trillion. Some of the largest REITs in the country are American Tower (AMT), Crown Castle (CCI), and Prologis (PLD), all of which trade on the New York Stock Exchange.

For individual investors, there are several advantages to owning REITs. The first is ownership of income generating assets. REITs are required to distribute 90 percent of their taxable income, at a minimum, to shareholders. The income is the rent they collect from their properties minus the cost of operating the properties. These dividends provide investors with regular cash flow while they also often enjoy long-term capital appreciation on the value of their REIT stocks.

Another benefit of owning REITs is portfolio diversification. Financial markets have become increasingly correlated over the years, making diversification even more important. REITs have historically showcased a low correlation to equities and bonds. REIT returns move in the opposite direction of many other investments, reducing the overall volatility of the portfolios they are part of.

Further, REITs are liquid investments that investors can easily sell in the markets if they are publicly traded. The fact that they are publicly traded also enhances their transparency, meaning investors can easily access information about their audited business performance through quarterly reports. In addition, many financial analysts evaluate these investments and publish their analyses of them, enhancing this transparency.

So how much should an investor allocate to REITs? The amount varies depending on the investor’s financial goals, investment time frame, and risk tolerance. However, according to Nareit, multiple studies have found a 5 to 15 percent allocation as optimal. It could start higher for investors with a long investment horizon, and then be reduced as they approach or enter retirement.

What if an investor already has a home? Even if investors already own homes, they can still benefit from buying into REITs. First off, houses consume cash because they are typically financed with mortgages and produce no income when they are owner occupied. There are also ownership costs such as insurance, maintenance, and taxes. In contrast, REITs generate investment income and investors do not have to manage or maintain the properties themselves. In addition, according to Nareit, the long-term return of owning REITs (11 percent from 2000 to Q1 of 2021) is much higher than that of owning a home, even after considering the rent a homeowner doesn't have to pay (8.5 percent from 2000 to Q1 2021).