Traditionally, investing in real estate has been seen as a path to wealth, but it comes with a fair share of expenses and responsibilities, including maintenance and property management. Real estate investment trusts (REITs), however, allow individuals to participate in the real estate market without having to buy physical properties. While REITs cater to investors with varying budgets, how much money you'll need to invest in one will primarily depend on whether the REIT is traded publicly on a stock exchange or is a private investment opportunity. A financial advisor can help you evaluate REITs and other real estate for your portfolio.
What Is a Real Estate Investment Trust?
Fundamentally, a REIT is a company that owns, operates or finances income-churning real estate. First introduced in the United States in 1960, REITs were designed to afford everyday investors access to large-scale, diversified portfolios of income-producing real estate. The introduction of REITs allowed average investors the chance to reap benefits from real estate without the enormous amounts of capital and resources it takes to purchase and manage a property.
REITs operate by collecting money from investors to buy, lease and sell income-generating real estate. They are organized as corporations and are legally obliged to distribute at least 90% of their taxable income to shareholders annually in the form of dividends.
According to the SEC, REITs also must:
Be structured as a corporation
Have a board of directors or board of trustees
Have shares that are fully transferable
Have at least 100 shareholders after its first year
Have at least 50% of shares held by more than five individuals during the second half of the tax year
Invest at least 75% of its total assets in real estate and cash
Generate at least 75% of its gross income from rents, mortgage interest or other real estate-rated sources
How Much Money You Need to Invest in a REIT
Determining the financial threshold for investing in a REIT may depend on the type of REIT you are looking to invest in. There are three primary variations: public, private and non-traded.
Public REITs
Publicly traded REITs are the most accessible option for investors. They are listed on stock exchanges, making them highly liquid. Because they're listed on U.S. stock exchanges, public REITs are subject to Securities and Exchange Commission (SEC) oversight.
You can start investing in public REITs with as little as the price of a single share, plus any associated brokerage fees. However, some public REITs may require a minimum investment in certain circ*mstances. Realty Income, which specializes in commercial leasing, requires a $1,500 minimum investment when purchasing shares through the company's direct stock purchase program.
Private REITs
Private REITs, on the other hand, often require a more substantial initial investment. These are not traded on public exchanges and are typically offered through private placements.
Unlike public REITs, these private investments are typically only made available to accredited investors and institutional investors. For individuals to be considered accredited investors, they must have a minimum net worth of $1 million (excluding their primary residence) or an income of $200,000 per year ($300,00 if married). According to the SEC, investment professionals can also qualify as accredited investors if they are in good standing and hold the Series 7, Series 65 or Series 82 licenses.
Since they aren't publicly available and don't register with the SEC, it's difficult to pinpoint specific investment minimums. However, investment firm Edward Jones says minimum investments for private REITs can range from $1,000 to $50,000.
Non-Traded REITs
Non-traded REITs are a lesser-known category. While they aren't listed on stock exchanges, non-traded REITs are required to register with the SEC and are subject to more oversight than private REITs. According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
Expected Return When Investing in a REIT
Investing in a REIT can offer several potential benefits to investors seeking a diversified portfolio. One of the key attractions is the potential for a stable and predictable income stream. Moreover, the potential for capital appreciation in REIT investments is another notable advantage. As properties owned by the REITs appreciate in value, the share prices of the REIT can also increase, potentially providing investors with capital gains over time.
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year. As of August 2023, the index's dividend yield was 4.47% – three times the dividend yield of the S&P 500, according to Nareit.
Yet, like any investment avenue, the return on REITs could be influenced by several specifics such as market conditions, the efficiency of the REIT’s management and the location and condition of properties in the REIT’s portfolio. As a case in point, the S&P 500 Index’s average annual total return between 2013 and 2022 was about 12.4%. This implies that while REITs might deliver steady returns, it’s not a given that they will consistently eclipse the broader market.
Benefits of Investing in a REIT
REIT investments carry several potential benefits, like the prospects of diversification, passive income and liquidity.
Owing to their investment in an array of properties across different sectors, REITs can grant exposure to the real estate market without the obligation for direct property possession. This could markedly diversify an investor’s portfolio and dilute risk while generating a regular income stream through their dividend distributions.
Unlike owning physical real estate, buying and selling public REIT shares is easy and can be done quickly on stock exchanges, providing investors with liquidity and flexibility. Public REITs are also required to provide regular financial reports and disclosures, offering investors transparency and visibility into their investments.
Drawbacks of Investing in a REIT Over Other Real Estate
While REITs do confer specific benefits, they also come coupled with potential downsides. For instance, REITs do not grant you control over the properties managed by the trust. Unlike direct property ownership, investors in REITs cannot chime in on decisions about the properties, such as when to purchase or sell, or how to manage them. This leaves investors dependent on the administration of the REIT for these decisions.
Another potential downside is the risk of market volatility, characteristic of all publicly traded securities. The share price of public REITs can fluctuate, influenced by market sentiment, economic data and other factors. This can result in periods of price turbulence, which could impact the value of your investment in a REIT.
Compared with direct real estate ownership, investing in REITs provides less control and potential for personal usage of the properties but offers enhanced liquidity and simplicity of diversification. Both options carry their unique set of pros and cons, and the selection between them will hinge on an investor’s individual circ*mstances, financial objectives and risk inclination.
Bottom Line
How much you'll need to invest in a REIT will depend on whether the trust is public, private or non-traded. While public REITs are traded on stock exchanges and can be purchased with relative ease through a broker or direct purchase program, individual investors can invest in private REITs only if they are considered accredited investors or work in the financial sector. Minimum investments for non-traded REITs, meanwhile, may be more than public REITs but less than their private counterparts.
Portfolio Management Tips
A financial advisor can help you select investments and manage your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Tax efficiency can be an important component of portfolio management. SmartAsset's capital gains calculator can help you estimate how much you may owe on taxes when selling an asset.And remember, offsetting gains with tax loss harvesting can help you lower your tax liability.
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