Are REITs a good long term investment?
They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
With rate cuts on the horizon, many publicly traded REITs have rebounded, and the industry as a whole seems well-poised for a recovery in the coming year. Ultimately, the decision on whether or not to buy REITs will depend on the specific circ*mstances and risk tolerance of each investor.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Summary of Why Investors May Not Want to Invest in REITs
But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.
Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.
An eye-popping yield likely inspired Jeff Yass of Susquehanna to buy 1.4 million shares of AGNC in the third quarter. Yass isn't the only billionaire placing bets on this mortgage REIT. John Overdeck and David Siegel of Two Sigma Investments scooped up 1.2 million shares.
The Cheapest Option: REITs—$1,000 to $25,000 or more
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments.
At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years. If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster.
Will REITs do well in 2024?
With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
It depends on many factors, including the investor's individual preferences, risk tolerance, and timeline. If you're looking for something steady that requires little to no work on your end, REITs are a good option. But if you like more control and freedom, a direct investment may be a better option.
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to. However, if an investor buys a non-traded or private REIT, the investment should be considered illiquid.
REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.
Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.
Still, in a general sense, they are income securities and do trade like income securities. You can usually count on high-yielding REITs moving up when rates are moving down.
Often, the bulk of REIT dividend payouts consists of the company's operating profit. As a proportional owner of the REIT company, the shareholder receives this payout as ordinary income and will be taxed at the investor's marginal income tax rate as nonqualified dividends.
Getting out of a non-traded real estate investment trust, or REIT, can often be rather difficult and expensive. Once a REIT is closed to new investors, the board of directors of the REIT can suspend the redemption policy.
Can a REIT go to zero?
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
Dividends are particularly valuable in retirement because they provide a consistent stream of income that can help cover living expenses. And, unlike bonds, dividend stocks offer the potential for capital gains as well as income. That means your portfolio can continue to grow even as you withdraw money from it.
While real estate has never been a big part of Buffett's investing strategy, Berkshire Hathaway has owned shares of STORE Capital, a REIT focused on single-tenant operational real estate.
| Company (ticker) | 5-year total return | 5-year dividend growth |
|---|---|---|
| Plymouth Industrial REIT (PLYM) | 156.1% | 1.6% |
| Equinix (EQIX) | 125.0% | 9.5% |
| Prologis (PLD) | 121.8% | 12.4% |
| Eastgroup Properties (EGP) | 107.9% | 13.3% |
| Symbol | Fund name | 1-year return |
|---|---|---|
| BRIIX | Baron Real Estate Institutional | 13.13% |
| RRRRX | DWS RREEF Real Estate Securities Instil | 9.65% |
| CSRIX | Cohen & Steers Instl Realty Shares | 8.93% |
| AIGYX | abrdn Realty Income & Growth Instl | 8.53% |
