We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.
Dipping your toes into the real estate market sounds like a great idea on paper, but it takes lots of upfront capital. Then there’s the constant maintenance, the ever-changing housing market, and the responsibility of finding reliable tenants for your short- or long-term rentals. After adding up all the costs, you might decide that real estate investing isn’t as easy as you’d imagined.
One way to invest in real estate without owning properties is by way of REITs. Short for “Real Estate Investment Trusts,” REITs are sort of like mutual funds for real estate. REIT companies pool together money from hundreds or thousands of investors, then spend it on income-producing real estate ventures and share the profits.
“There are a lot of ongoing costs when one owns real estate, and they’re getting some kind of income from that real estate,” says Omar Morillo, a certified financial planner and wealth advisor at Octavia Wealth Advisors in Miami, Florida. “A REIT offers a way to tap into the real estate market without undergoing all of those expenses.”
But REITs aren’t perfect. There are some downsides to consider. Read on to learn more about the pros and cons of REITs and whether you should add them to your investment portfolio:
What Is a Real Estate Investment Trust
Imagine spending anywhere from $1,000 to $25,000 on REIT shares and in turn getting a new stream of income.
That’s how things work with REITs. REITs are publicly traded or private companies that own, operate, and/or provide financing for real estate and assets that bring in income. The assets included in a REIT might include commercial buildings such as office spaces, hotels, self-storage facilities, warehouses, hospitals, data centers, cell towers, or residential apartment buildings. It’s common for REITs to be clustered according to sector or type—think industrial, healthcare, retail, or residential. There are even marijuana REITS.
To qualify as a REIT, a company must check off a long list of criteria. This includes paying their shareholders at least 90% of their taxable income each year as dividends. Plus, they must invest at least 75% of all their assets in real estate assets and make at least three-fourths of their gross income from sources that are tied to real estate. The lion’s share (95%) of their gross income has to come from real estate sources and dividends. Last, no more than one-fourth …….