Investing in real estate investment trusts (REITs) is a very popular passive real estate investing strategy. It is very attractive to average investors because it doesn’t require a large investment to own a piece of real estate.
If you had been thinking about investing in REITs, you should definitely understand how they work and the many different types that exist.
A REIT is a company, corporation, or trust that invests in income-producing commercial or residential real estate. This passive real estate investing strategy allows its investors to combine capital to purchase and maintain a piece of real estate while receiving dividends in return.
1. Mortgage REIT
A mortgage REIT generates income by the interest earned from investing in either a residential or commercial mortgage. The biggest downfall with mortgage REITs is that mortgage interest rates will fluctuate with the economy, affecting the mortgage REIT’s performance.
So, if mortgage interest rates are very high, you will likely generate a better return from the investment. If you would like to start researching mortgage REITs, you can start with the list below.
Starwood Property Trust Inc
Blackstone Mortgage Trust Inc.
PennyMac Mortgage Investment Trust
Ladder Capital Corp Class A
An equity REIT generates income by collecting rental income by properties that the company or corporation owns. A portion of that rental income is then dispersed among investors within the REIT as dividend income. The properties within the REIT are usually held for the long-term and can be in a variety of industries.
*All the REITs listed below are a form of Equity REIT!
2. Industrial REITs
Industrial REITs are owned and managed real estate used for storage, manufacturing, production, and distribution of goods. Industrial REITs are typically leased for factories, distribution centers, and fulfillment centers. Investors who own industrial REITs are paid through dividends from a portion of the tenants’ rent.
Over the past years, industrial REITs have been very successful because there has been an increase in fulfillment centers and warehouses due to the e-commerce industry's growth.
Owners of E-commerce businesses need the extra space to store and run their businesses, making industrial REITs a very lucrative passive investment vehicle.
If you are interested in industrial REITs, you can start by researching the ones listed below.
Duke Realty Corporation
3. Infrastructure REITs
Infrastructure REITs own and manage real estate that is used for communication and energy resources like cellular towers and renewable energy. It is very typical for most infrastructure REITs to have a designated sector of infrastructure that it invests in. For example, renewable energy infrastructure REITs only invest in renewable energy sources such as solar and wind energy.
If you are interested in investing in infrastructure REITs, you should be aware that they are easily influenced by government regulations. A perfect example would be President Biden's executive order to cancel the Keystone Pipeline. If you were an investor backing the pipeline's creation, you may not have known that it would not be built due to the government's future action.
However, that doesn't make infrastructure REITs a bad investment, but you need to make sure that you are educated in the subject matter. If you want to invest in infrastructure REITs, below are some good infrastructure REITs to consider.
Landmark Infrastructure Partners
CorEnergy Infrastructure Trust
4. Data Center REITs
Data center REITs own and manage real estate that customers use to adequately store data. This type of REIT is in charge of helping provide reliable and uninterrupted power sources to protect and secure important data sources.
Motley Fool reports that data centers are growing 1.6 times faster than they are being built, thus making data center REITs highly valuable at this current time. So if you are thinking about investing in data center REITs, consider starting with the REITs below.
5. Hospitality REITs
Hospitality REITs own and manage hotels, motels, resorts, and other related leasing properties. It is not a surprise that the hospitality industry as a whole is very seasonal. Depending on the market, seasonality may not be an issue because it is quite possible to use the additional profits during the high traffic seasons to make up for the off-season. However, this is not a guarantee, so it is important to do additional research when investing in REITs of this kind.
Another element of risk that exists within hospitality REITs is that during recessions, they are the first industry to be negatively impacted. When a recession hits, people tend to not travel as much, leading to less revenue and dividends for the REITs’ investors.
When a recession is not occurring, hospitality REITs can be a great investment. During high traffic seasons within a particular market, they can easily exceed the past year’s revenue with additional tourism in the area. This makes for a higher dividend for you as an investor.
Below are some common hospitality REITs to begin your search.
Host Hotels & Resorts
Ryman Hospitality Trust
6. Healthcare REITs
Healthcare REITs invest in and own the real estate associated with medical centers, nursing facilities, and retirement homes. When investing in a healthcare REIT, most profits are tied to the healthcare system’s success. An added bonus to this REIT is that we know the need for healthcare is not going anywhere.
However, as an investor, you should still pay close attention to the quality of the health services that a facility provides and make yourself familiar with the operators that will provide the health services.
You should also focus on areas where there is an increased demand for health care services. A good example would be a market with a growing aging population like Florida. Markets that cater to these specific demographics will be in high demand for health care services.
Below are some popular healthcare REITs to begin your research.
Healthcare Trust of America
7. Residential REITs
Residential REITs own and operate small to large multi-family buildings such as student housing, affordable housing, mobile home parks, and apartment buildings. Some of the biggest residential REITs own large apartment buildings in urban areas like New York, Los Angeles, and Miami.
When investing in residential REITs, investors tend to look at markets with falling vacancy rates. Falling vacancy rates signal an increase in a city's population and job growth, meaning more people are looking for places to stay. Due to the high demand for housing, investors take advantage of this opportunity by investing in a resident REIT that will provide the necessary housing for the new population.
However, recently there have been some vulnerabilities that have been showcased within the residential REIT industry. Due to the uncertainty around federal, state, and local government policies and regulations as a result of the Coronavirus, investors are very unsure what the future holds.
At the time of this writing (March 2021), there is still a national moratorium on evictions. Investors are worried that if unemployment benefits and/or stimulus checks stop coming, some of their tenants won’t pay rent. This would also lead to investors taking a loss on their returns because the REIT will have to foot the bill since they can't evict and replace tenants.
Below are some residential REITs to consider.
Essex Property Trust, Inc.
8. Timber or Timberland REITs
Unlike most REITs, timber REITs own and manage land instead of buildings. Most of the timber REITs make money from timber harvesting and production from the land that they own; however, there are a few that also capitalize on mineral, oil, and other natural resources that can be sold for profits on their land.
Timber REITs are solid long-term investment vehicles because the timber cost tends to keep up with inflation over time. Therefore timber REIT investors can expect a steady dividend over the year with this vehicle.
The one major risk associated with timber REITs is that the government can easily change its regulations and alter the industry as a whole. Similar to infrastructure REITs, timber REITs are a solid investment vehicle, but because government regulations change all the time, you should expect some volatility throughout the years.
Below are some timber REITs to help jumpstart your research.
9. Retail REITs
Retail REITs own and manage retail properties such as shopping malls, shopping centers, and other retail stores. The structure for a retail REIT is very similar to that of a residential REIT in that the REIT managers lease space to tenants who pay rent to run their services in the facility. A portion of the tenant’s rent is given out to investors as a dividend. This model is completely dependent on tenants paying rent.
Retail REITs are by far the most popular form of REIT investing because the retail industry is so large and profitable. According to an article published by NASDAQ, retail REITs account for 24% of all re-investments made in the United States.
Typically, the best performing retail REITs are the ones that own and manage long-term stable retail tenants such as groceries and Home Improvement stores. Shopping malls and centers have shown over the past few years that most shopping is being done online, hurting the performance of REITs that own them. The coronavirus pandemic and the shutdowns of many shopping malls and centers further showcased the flaw in this type of REIT investing.
Simon Property Group
National Retail Properties
Regardless of which type of REIT you choose to invest with please be sure to do some thorough research and talk to an investment advisor before you actually invest your money.