I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
If you’re a smart investor, you know that there are plenty of ways to diversify your portfolio. From investing in stocks and bonds to purchasing gold bullion, many people use different strategies to create cash flow.
The real estate industry is one of these and very lucrative. Real Estate Investment Trusts (REITs) make it possible for anybody to engage in real estate portfolios.
Trading in REITs uses the same channels as other sectors, such as the purchase of shares in a corporation or participation in a mutual or exchange-traded fund.
If you want an easy and secure way to invest in real estate, an equity REIT may be exactly what you’re looking for.
Here, we’ll break down equity REITs, what they do, and how they can make you money in the future.
Welcome to the future of real estate investing. Build a portfolio of private assets like real estate, private credit, and venture capital.
Equity REIT Definition
Equity REITs are real estate businesses that own or manage income-producing properties and lease out their units to others for a profit.
Equity REITs give most of their yearly earnings to investors and shareholders in the form of dividends.
How Equity REITs Work
In 1960, Congress authorized REITs so ordinary citizens could own stock shares in substantial real estate enterprises. This change simplified the process of acquiring and selling properties for investors.
The Internal Revenue Service has a few requirements that REITs must fulfill to avoid normal tax rates:
- Pay out at least 90% of yearly taxable revenue as dividends to shareholders
- Put at least 75% of their wealth into physical property or liquid funds
- A total of 75% or more of their annual revenue must originate from the sale, rental, or other disposition of a real estate
- Have at least 100 stockholders before the end of the first year
- Have no more than five people own more than half of the company’s shares in the second half of the tax year
REITs that follow these guidelines are exempt from paying corporate income tax, allowing them to lower their borrowing costs for realty and increase their profits to distribute to investors.
More than 535,000 individual properties amount to more than $3 trillion in assets held by public REITs alone in the United States.
U.S.-listed REITs represent more than $1.7 trillion in the stock market. While most REITs specialize in one specific kind of property, others may have holdings in many.
Most REITs are equity REITs. When the market talks about REITs, they typically mean equity REIT stocks and funds.
Examples of Equity REITs
A few examples of equity REITs include Arlington Asset Investment, Sabra Healthcare REIT, and Alexandria Real Estate Equities.
- Mortgage-focused REIT Arlington Asset Investment is listed on the New York Stock Exchange (NYSE). Mortgage lending is its mainstay, and the interest payments it receives are its primary source of revenue.
- An NYSE-listed REIT, Alexandria Real Estate Equities, specializes in the management of office buildings. Rental payments from companies are a common source of revenue for office space funds.
- Sabra manages over 40,000 beds among its almost 450 clinics, nursing homes, and retirement communities for the elderly. SBRA experienced a nearly 19% gain this year as of Aug. 4, 2022.
Mortgage REITs vs. Equity REITs
Based on the kind of assets they invest in, REITs may be equity REITs, mortgage REITs (mREITs), or hybrid REITs.
It is vital to understand the inner workings of the REIT market before purchasing a REIT, as they all carry different risks.
Equity REITs
Equity REITs function similarly to traditional landlords, taking care of maintenance and other management responsibilities on your behalf.
They own the title to the property, receive rent payments, manage and improve the premises, and reinvest the proceeds.
Mortgage REITs
mREITs are similar to equity REITs, but the company does not own the title to the underlying property. Instead, it possesses the debts that the property garners through rentals and mortgages.
Mortgages are one source of revenue for REITs. When a family takes out a mortgage to purchase a home, the REIT may acquire the mortgage from the original lender and receive the monthly payments over time.
Note: mREITs are much riskier than equity REITs, but often provide more significant payouts due to larger initial investments.
Hybrid REITs
Equity and mREITs can come together to form hybrid REITs. These companies have both real estate and commercial mortgages, which balances the risk factor of mREITs with the lower earning potential of equities.
Benefits of Equity REITs
REITs have a high rate of return, a history of paying out significant dividends, and often offer long-term capital gain.
When looking at the overall returns over the long run, REIT stocks are usually on par with value equities and above the returns of lower-risk bonds.
Equity REIT benefits include:
Competitive long-term performance: Total returns from REITs over the long run have been comparable to those from other equity investments.
The steady flow of income guaranteed by their leases is the primary source of their dividends, which is a good long-term option.
Substantial and stable dividend yields: Historically, dividend yields from REITs have been a reliable source of income, regardless of the market circumstances.
REITs must transfer at least 90% of their taxable profits to their shareholders each year.
Liquidity: REITs that are traded publicly have high liquidity on the primary stock markets.
Transparency: Business and financial press, independent directors, analysts, and auditors keep an eye on how publicly traded REITs are doing.
This monitoring affords investors some security and they have access to more than one indicator of a REIT’s health.
Portfolio diversification: REITs provide exposure to real estate with limited connection to traditional stock and bond markets.
Listed REIT stock returns tend to be uncorrelated with those of other stocks and fixed-income assets, so they may help spread risk throughout a portfolio.
Disadvantages of Equity REITs
REIT investments are subject to some of the same dangers as stock market investments. The following problems are prevalent while investing in REITs:
Weak growth: REITs that trade on public stock markets often pay out a significant portion of their profits to investors. The little residual capital prevents the REIT from increasing its portfolio.
Since private REITs are exempt from some of the exact requirements as publicly traded ones, they may be able to retain a more significant portion of their earnings for future investments.
High taxes on dividends: REIT distributions can have more taxes than dividends from other assets. If you receive dividends, you should only have to worry about paying capital gains tax on them.
REITs do not enjoy preferential tax treatment and are taxable income.
Potentially high fees and risk: However, just because a REIT has SEC registration doesn’t imply that it’s risk free.
Before investing in REITs, you should consider interest rates, the real estate market, tax legislation, and the location you wish to invest in.
Trends affect the performance of REITs: Investments in REITs are especially susceptible to changes in the real estate market.
For instance, you could expect a decline in your shareholder returns if the company has rental properties in a region where rental revenue is declining.
Since the real estate market is where REITs put all their money, REITs are less protected against market volatility.
Little control over performance: Physical property investors have more control over their investments than those who buy shares in a REIT.
There is much more leeway in using standard procedures in the real estate industry.
REIT investors have little control over the growth of their portfolios. If you’re unhappy with the returns, putting them up for sale is your only choice.
Another potential drawback is the inability to sell shares in certain private REITs for years after purchase.
3 Best Equity REITs to Invest in 2023
While there are many equity REITs to invest in, here are a few of the best companies you can purchase stocks from in 2023.
Invesco KBW Premium Yield Equity REIT (KBWY)
First up is the Invesco KBW Premium Yield Equity REIT ETF (KBWY). Released on Dec. 2, 2010, the KBWY is an innovative beta exchange-traded fund offering extensive real estate exposure to the exchange-traded funds (ETF) segment of the market.
When it comes to the U.S. real estate market, KBWY is an outsider. The fund uses a dividend-yield weighting strategy rather than the standard market capitalization weighting.
It’s important to note that KBWY avoids large-size REITs. This results in an underweighting of residential REITs and an overweighting of commercial REITs, creating a basket highly skewed toward small stocks (about 70% small- and micro-caps).
- Type of investments: Shares of small- and mid-cap equity REITs
- Markets: Dow Jones, Nasdaq
- Best For: Long-term investors
Equity Residential REIT
The core business of the Equity Residential REIT (EQR) is the purchase, construction, and administration of urban residential real estate.
Its focus is on multifamily residential property acquisition, development, and management. EQR’s core activity is creating rental revenue by leasing apartment units to tenants.
It has properties in Boston, New York, Washington DC, and California. The corporation aims to grow its footprint in Denver, Atlanta, Dallas/Fort Worth, and Austin.
- Type of investments: Equity joint ventures, pre-sale transactions at market cap rates, property pools operating partnership units
- Markets: Dow Jones, Nasdaq
- Best For: Beginner investors
FTSE NAREIT Equity REIT
Finally, the FTSE NAREIT Equity REIT tracks the performance of REITs operating in the commercial real estate sector.
It provides market players with a comprehensive range of instruments for comparing and monitoring exposure to real estate in the U.S. economy.
- Type of investments: Commercial real estate, commercial properties
- Markets: London Stock Exchange
- Best For: Beginner investors
How to Invest in Equity REITs
To put your money into a REIT on a primary stock market, you will need to work with a broker to buy shares.
You can acquire shares of a non-traded REIT via a broker. Other types of REITs include REIT mutual funds and ETFs.
Is an Equity REIT a Good Investment?
REITs are an excellent alternative to only investing in equities and bonds because they provide investors with the potential for higher dividends and long-term capital gain.
The prices of equity REIT shares face standard deviation, just like those of other equities. Furthermore, commercial real estate remains a cyclical industry, even if the real estate market cycle is distinct from other markets.
If you think an equity REIT may be the right diversification method for you, a broker or financial adviser can help you learn more.
As far as real estate investing is concerned, equity REITs are low-risk, high-potential investments that can earn you money down the line.
Equity REIT FAQs
If you still have some questions about REITs, you’re not alone. Here are a few questions that new investors typically ask.
What is a good return for an equity REIT?
With a 3% dividend yield for U.S. stock REITs and divided growth of 3%–4% annually, a 6%–7% annualized return is a fair investment return expectation for equity REITs.
How are equity REITs taxed?
The government taxes REIT dividends as ordinary income, with a top rate of 37% (rising to 39.6% in 2026) and an additional 3.8% surtax on investment income.
What are the risks of investing in an equity REIT?
Leverage, liquidity, and market risk are three of the most significant dangers REITs face.
Welcome to the future of real estate investing. Build a portfolio of private assets like real estate, private credit, and venture capital.
I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
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