2. Investing in real estate with REITs
Real estate investment trusts (REITs) are kind of like stocks, but for the real estate market.
They’re companies that own, operate, or finance real estate—like apartment buildings, shopping centers, offices, data centers, and more—but in many cases with shares that trade on exchanges, like stock. When you buy a stock, you become a partial owner in the underlying company. Similarly, when you buy a share of a REIT, you become a partial owner of the REIT’s underlying properties.
They offer a way to put real estate investing within reach of ordinary people.
Pros of investing in REITs
- Low up-front cost. Buying one share of a REIT is much more achievable for many investors than buying an entire property. If you invest with a broker that offers fractional shares, then you may even be able to start with as little as $1. (Learn more about fractional shares with Fidelity.)
- Potential to earn ongoing income. REITs are generally set up to pay out regular dividends to their investors. Many REITs act as landlords to underlying tenants, and so pass most or all of the rent they receive on to their investors. That said, it’s important to be aware that those dividends aren’t guaranteed, and a REIT can always reduce its dividend payments.
- Potential tax benefits. Most corporations face what’s called “double taxation,” because the company itself pays taxes on its income, and investors also pay taxes on their dividends and realized gains. REITs, however, qualify for special tax rules that most often allow them to pay no corporate income tax1 (though REIT investors still generally owe taxes on any dividends and realized gains).
- Professional management. By investing in a REIT, you can access the potential benefits of real estate investing without the headaches of managing real estate. Choices like what properties to buy, what to do if a tenant is missing rent payments, or what to do if a property floods are in someone else’s hands.
Cons of investing in REITs
- Requires research. Just as with buying individual stocks, if you’re going to invest in individual REITs you need to do some work to understand the REITs universe and choose specific investments.
- Time and cost to build a diversified portfolio. While you could get started with as little as one share or $1, that doesn’t mean that you should. Instead, even just within the portion of your portfolio that you have earmarked for REITs, you’ll probably want to diversify—meaning you invest in a range of different REITs with different attributes. This increases the cost, both in dollars and in time, of building and maintaining a portfolio of REITs. And again, while a fully diversified portfolio may include some REITs, it may generally also include stocks and bonds, with diversification across many industries, sectors, and regions.
- Subject to potential market volatility. Because REITs trade on exchanges like stocks, they can be subject to market fluctuations in the same way that stocks are.
- Comes with unique risks. There is no guarantee that the issuer of a REIT will maintain the secondary market for its shares, and redemptions may be at a price that is more or less than the original price paid. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.
Is investing in REITs right for you?
Investing in individual REITs might be right for you if you want to take a hands-on approach to real estate investing, but you don’t have the financial means or interest to buy investment properties. Just remember the importance of diversifying your portfolio across different types of investments, and also diversifying within the portion of your portfolio that’s dedicated to REITs. Investors interested in learning more can explore Fidelity’s real estate investing resources.
