How and Why to Invest in Real Estate Investment Funds with REITs

LAST REVIEWED Apr 23 2020 8 MIN READ

By The Human Interest Team

It would be great to have enough cash to buy an apartment building or commercial real estate nationwide and have the wherewithal to manage your real estate empire. Yet, most investors have neither the time nor the money to capture the potential investment gains of investing in real estate.

REITs or real estate investment trusts were invented in 1960 so that the everyday consumer had access to real estate investing. From portfolios of shopping malls, nursing homes, apartment buildings, self-storage facilities, and more, you can find ways to capture both commercial and residential real estate profits. Or, for one-stop shopping, there are broadly diversified index REITs.

Per REIT.com, there are 189 REITs registered on the New York Stock Exchange from which to choose as of August 31, 2016. Before you become overwhelmed or paralyzed with choice, there are ways to winnow down the list of potential REIT investments.

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What are the benefits of investing in a REIT?

For investors with a 401(k) and/or an investment brokerage account, you likely own US and international stock and bond funds. Those investments give you exposure to international and U.S.  businesses in varying industries. By adding a REIT investment to your existing funds, you increase your investment portfolio’s diversification and increase your investment income. REITs are known for their high dividend payments.

For investors with a 401(k) managed by Human Interest, you probably already have access to the diversified Vanguard REIT Index Admiral Fund (VGSLX).

When investing in REITs you achieve multiple benefits, in one investment product. First on the list of REIT pros is that they are required by law to pay out 90% of their income. That means you get a juicy dividend payment that yielded 4.00% to 8.48% since the turn of the century, according to the FTSE Nareit US Index. In addition to income, there’s the possibility of capital appreciation. Because REITs are distinct investments from stocks and bonds, you get an added diversification benefit. In other words, your REIT investment returns may not mirror those of your stock and bond funds and might minimize portfolio risk.

If you live in an apartment, you realize that your rent goes up, regularly. Wouldn’t it be nice to be on the receiving end of the growing rent payments? Owning a REIT allows you to be the landlord, only without the aggravation. Additionally, not only do rents rise but so does the value of the building. REIT owners benefit from increasing real estate values too.

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REIT options: Office, industrial, retail, index, etc.

With 189 REITS from which to choose, how do you pick one? Well, if you want the easiest method, go with a diversified REIT index fund such as the Vanguard REIT Index Fund (VGSIX) or ETF (VNQ), the Fidelity Real Estate Index Fund (FSRVX) or another broadly diversified REIT index fund. But, if you’re looking to hone in on a specific real estate location or sector you can choose a specialized real estate sector, from these REIT categories:

  • Office REITs-Own and manage commercial office buildings

  • Industrial REITs-Own and manage industrial facilities such as warehouses etc.

  • Retail REITs-Own and manage retail and commercial stores

  • Lodging REITs-Own and manage hotels and motels

  • Residential REITs-Own and manage apartment buildings, student housing, mobile homes, and even single-family homes. Some residential REITs specialize in specific geographic regions.

  • Timberland REITs-Own and manage types of timber-related properties that are involved in selling timber, home building, and cellulose products

  • Health Care REITs-Own and manage health care-related properties such as senior living facilities, hospitals, and nursing homes

  • Mortgage REITS-Invest in various types of real estate mortgages

If those choices weren’t enough, you might invest in self-storage, data center, infrastructure, and specialty REITs. Finally, there are REIT funds that also own properties abroad, giving you exposure to international real estate markets.

When diving into a specific type of REIT, it’s helpful to study the current and future economic outlook. For example, if you want to invest in commercial real estate in New York City, you might look at the New York REIT (NYRT).  But first, you’d need to understand what will drive commercial rents higher.

As when choosing any investment, before clicking the buy button, do some investigation into the specific REIT. Look at the historical data, expense ratios, profitability, and consider the economic outlook for the sector. All this information can be uncovered for free on Yahoo! Finance, the individual REITs website, and on your investment brokerage company’s site. Additionally, REIT.com provides free research on the real estate industry from NAREIT, the national association of real estate trusts.

How to invest in a REIT

Investing in a REIT is as simple as buying a stock or bond mutual or exchange-traded fund. All publicly traded REIT funds have an identifying Ticker Symbol. Simply log into your investment brokerage website, plug in the REITs ticker symbol, number of shares, and click buy.

Final REIT investing thoughts

REITs have enjoyed favorable returns over time when compared with those of stock and bond funds. From 1978 through March 2016, total returns for publicly traded U.S. Equity REITs averaged approximately 12.87% annually in comparison with 11.4% for stocks. But, this doesn’t mean that in the future, the outperformance of REITs over that of stocks will continue. No one can predict future returns. It’s worthwhile to consider that as interest rates increase, as is likely to occur in the future, the cost of mortgages will increase. This may put a damper on the real estate industry.

In the last analysis, REITs are an easy way to gain access to real estate investments. Yet, like any other financial investment, the future is not guaranteed. You may find ups and downs in the value of your REIT investment-and that is why it’s crucial to maintain a diversified portfolio, with exposure to various types of financial investments.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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