How to Invest in Real Estate Using REITs

Real estate has long been considered one of the safer investments for a decent return, regardless of the ebbs and flows. There are many options for real estate investing. However, if you can’t buy actual real estate, you can still invest through a real estate investment trust (REIT). A REIT owns real estate and provides potential returns for your investment. This allows you to participate in the real estate market without the large upfront investment.

To determine whether a REIT is right for your personal portfolio, consider working with a financial advisor.

What Is a REIT?

A real estate investment trust (REIT) is a fund that either owns income-producing properties or the mortgage on those properties ¹ . REITs typically specialize in a particular type of property, though some also offer a mix of investments in a hybrid REIT.

The REIT sells shares to investors. You can purchase directly from the company or through an exchange-traded fund (ETF) or mutual fund. When you buy shares, you buy an interest in the properties held by the trust. When property values appreciate, the REIT pays shareholders dividends.

As long as the company’s investments continue to generate income, you should receive a steady stream of returns. This allows you to reap the benefits of an improving market with fewer strings attached.

6 Ways to Invest in REITs

There are several types of REITs ² , so it is important to know the differences before investing.

Each offers a different way to invest, depending on the type you’re interested in. However, each REIT also has its own pros and cons. Understanding how each works can help you determine which type best aligns with your portfolio.

1. Retail REITs

Retail REITs ³ are the most common type of REITs.

Typically, a retail REIT owns shopping centers, malls and freestanding retail establishments. They make their money by charging tenants rent. Therefore, their profitability is largely determined by tenants’ ability to pay. As shopping continues to shift online and away from brick-and-mortar stores, retail REITs are facing increased pressure to adapt. However, there are plenty that still continue to pay strong dividends.

2. Residential REITs

Rather than owning shopping centers, residential REITs consist mostly of multi-family apartment buildings and mobile homes ⁴ .

Intuitively, a residential REIT performs well when the rent of the buildings it owns is rising. Therefore, be on the lookout for REITs that own buildings in large cities with growing economies and low vacancy rates.

3. Office REITs

Office REITs invest in office buildings, as the name suggests. They generate income by charging rent for use of the property ⁵ . When demand is high, shareholder dividends are high, as well.

As with residential REITs, consider the strength of the economy, rent prices and vacancy rates when researching an office REIT. If plentiful businesses are sprouting up and looking for office space in the area, it’s a good sign that dividends may be strong.

4. Healthcare REITs

Healthcare REITs own a range of medical care facilities, including hospitals, clinics, retirement homes and assisted living facilities ⁶ . They are considered a mirror to retail REITs. While physical retail stores continue to lose business to online shopping, healthcare costs across the country continue to rise. Whether medical providers will benefit from these rising costs is a complicated question to answer.

However, it’s reasonable to think that demand for health care will continue to increase as the U.S. population ages.

5. Mortgage REITs

Mortgage REITs work a little differently because they focus on ownership of mortgage loans rather than the property itself ⁷ . Instead of turning a profit from rental income, a mortgage REIT bases its returns on the interest paid on the loan.

Mortgage REITs can be a nice way to diversify your holdings, even among REITs. This is because you don’t assume the risk of actually owning real estate. However, these REITs carry some risk because the value of their existing mortgages is tied to interest rate fluctuations.

6. Industrial REITs

Industrial REITs own and operate properties like warehouses, distribution centers, and manufacturing facilities ⁸ . Like other REIT types, they generate income by charging tenants rent. Their tenants tend to be logistics companies, e-commerce fulfillment operations and manufacturers. Online shopping has also shown growth, with a steadily increasing demand for large-scale distribution space.

When evaluating an industrial REIT, pay attention to where its properties are located. Warehouses near major highways, ports and dense population centers command higher rents and maintain lower vacancy rates. This translates directly into stronger and more consistent dividends for shareholders.

Pros and Cons of Investing in a REIT

Like any other investment, purchasing shares in a REIT has advantages and disadvantages.

The most obvious benefit is that it’s an easy way to invest in real estate. Unless you have substantial cash or other investors backing you, buying and renting or selling multiple properties for a profit usually isn’t a realistic plan. Instead, you can reap the rewards of a thriving REIT without investing a lot of time or buying property.

One downside of REITs, particularly mortgage REITs, is their susceptibility to interest rate fluctuations. Interest rate changes can significantly alter mortgage value on the resale market. Therefore, REITs are particularly vulnerable in a way that typical stocks and bonds aren’t.

REITs, as measured by the MSCI U.S. REIT index, have boasted higher annual returns than the S&P 500 since 2010. However, that doesn’t mean they’re inherently better investments ⁹ . Just two years earlier, many REITs suffered extreme losses from the financial crisis and its effect on the real estate market.

How an Advisor Can Help You Create a Plan to Invest in REITs

REITs span several distinct categories, each behaving differently depending on economic conditions, interest rates and sector-specific demand.

Type of REITs

A financial advisor can help you identify which types fit your income goals and risk tolerance. This may mean residential and industrial properties with strong long-term demand. During periods of structural uncertainty, you may avoid exposure to office and retail.

Without this sector-level analysis, it is easy to concentrate on areas of the real estate market that are working against you.

Dividend Income

Dividend income is a central reason most investors consider REITs. However, a high dividend yield is not always a sign of a healthy investment. A financial advisor can dig into the underlying financials, looking at occupancy rates, tenant quality, debt loads and cash flow.

Based on this, they can assess whether a REIT’s dividend is built on a solid foundation or is at risk. That distinction matters enormously for investors who are counting on that income to cover retirement living expenses.

Interest Rates

Interest rates have a direct impact on REIT performance, and timing matters when building a position. Rising rates tend to compress REIT valuations and increase borrowing costs for the companies themselves. Falling rates generally have the opposite effect.

A financial advisor can help you assess where rates appear to be heading. They can size your REIT allocation to account for that risk rather than ignoring it.

Taxes

Most REIT dividends are taxed as ordinary income ¹⁰ . This can significantly reduce returns for investors in higher tax brackets compared to other dividend-paying stocks.

A financial advisor can determine whether your REIT holdings are better suited to a tax-advantaged account. With an account like an IRA or Roth IRA, the tax treatment becomes irrelevant. It may be better to hold them in a taxable account, given your current income level. Getting that placement right adds return without requiring any change to the investments themselves.

Investment Amount

How much you should invest in REITs depends on specific factors, including:

• Do you already own real estate directly?
• How much income does your portfolio need to generate?
• How much volatility can you tolerate?

A financial advisor can set an allocation target for meaningful real estate exposure without overconcentrating in a single asset class. This balance is harder to strike than it sounds, particularly for investors who already own a primary residence.

Buying individual REIT shares, a sector-specific ETF or a broad real estate index fund each involves different tradeoffs in cost, concentration, and control. A financial advisor can help you decide which approach fits your situation. Together, you can build and adjust a position as market conditions, interest rates and financial needs change.

A REIT strategy with this kind of structure produces more consistent results than one without a clear plan.

Bottom Line

Investing in REITs can be a great way to add real estate to your portfolio without the work of buying or selling properties. Like any investment, REITs come with their fair share of risk. Tenants who fail to pay rent or mortgages, and those whose mortgages lose value, are impossible to predict in advance. While risk-free investments don’t exist, REITs can provide you with strong dividends while diversifying your portfolio.

Tips for Investing Responsibly

• REITs are an intriguing investment product for many, but they can also be confusing to wrap your head around. Talking over your options with a financial advisor can help clarify the process. If you don’t currently have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Want to take a look at what your portfolio will look like in a decade? SmartAsset’s investment calculator can help you do just that. Enter how much you have invested, how much you’re contributing and what rate of return you expect. We’ll then show you your investment growth five, 10 or even 30 years into the future.
• As we mentioned, REITs can be a nice way to diversify your assets. However, they’re far from the only way to do so. If you like, you can invest in real estate properties themselves. Also, you can invest in commodities like precious metals, energy resources or even livestock.

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