While one real estate investor may prefer buying the highest yielding REITs, another may want to fix and flip homes to profit from the real estate market. Both are excellent ways to build wealth when you gain investment experience.
When it comes to real estate, a diversified portfolio is less sensitive to the winds of change. By diversifying their assets by property type, location, or stocks, they can navigate different real estate markets confidently. For instance, an investor may enjoy managing buy-and-hold real estate but also want a few “hands-off” stock assets that pay a monthly dividend.
Collecting distributions from real estate investment trusts (REITs) is one way investors can make money off real estate. This is also a great way to achieve portfolio diversification while not worrying about managing another property. What’s a REIT, how can you start investing in this asset class, and how can you identify the highest-yielding REIT for your portfolio?
What is a REIT?
In the 1960s, the federal government created Real Estate Investment Trusts (REITs) to give everyone a chance to earn realty income through commercial real estate ownership. REITs are companies that own income-producing real estate. Namely, a REIT leases a space, collects rent, then gives that income back to shareholders in the form of a dividend yield.
When you invest in real estate investment trusts, you get some of the proceeds through dividends based on their current stock price. most of these stocks should be accessible through the New York Stock Exchange (NYSE). There are three main types of REITs:
- Equity REITs: These real estate companies own commercial real estate properties and provide dividends to shareholders when the right conditions are met. These have lower dividends but less risk than the other types of REITs. The type of property owned can be multifamily buildings, shopping centers, single-tenant residences, healthcare buildings, office properties, and much more.
- Mortgage REITs (mREITs): These high-yield REITs are companies that buy the mortgage from the property’s original lender and collect its monthly payments. These have the potential for higher dividends than standard REITs, but have a higher risk.
- Hybrid REITs: These are a combination of equity REITs and mREITs.
Since REITs own many types of real estate, investors have a lot of choices. While one may prefer to invest in offices and self-storage units, another may prefer to invest in apartment buildings, warehouses, hospitals, or hotels. Or, another may accept higher risks and shoot for higher dividends with mREITs.
- Note: The typical monthly dividend from a REIT are taxed as ordinary income. A surtax on investment income can also apply. Check with your financial advisor to determine how much to prepay on your taxable income so you can stay on top of your dividend stocks. Also, you can explore some tax-free options like owing REITs in an IRA.
Benefits of REITs
REITs can become an excellent supplement to any real estate investor’s portfolio. Here are some other benefits you can reap from holding this type of asset.
- REITs pay dividends to all shareholders. This means you don’t have to do anything to get returns.
- By law, REITs must pay 90% of their annual income as shareholder dividends, which makes them among the highest dividends in the stock market. So, even if you don’t get the best high-dividend REITs, this type of stock can still do better than other investments on the open market.
- REITs are easy to acquire and sell through the stock exchange, which is excellent for investors who want to avoid being hands-on or going through lengthy purchase and selling contracts.
How to Find The Highest Yielding REITs (With Risk in Mind)
Every investment has a degree of risk. However, some REITs come with less risk than other types. The trade-off is that lower-risk REITs typically come with lower returns. Ultimately, each investor must decide how much volatility (and potential rewards) they are willing to accept in their portfolio. Here are some general pointers to assist with your decisions.
- Equity REITs are less risky than mREITs. Though they pay lower dividend payments, they are more stable in cash flow than mREITs. This is an excellent option for a new investor or anyone looking to bolster their portfolio with some less volatile assets. If you want the best of both worlds, ask your financial advisor about hybrid REITs.
- Publicly-traded REITs are less risky than non-exchange-traded REITs. Publicly traded REITs may produce lower returns than non-exchange REITs, but they follow strict guidelines, are more transparent, and don’t have conflicts of interest with shareholders.
- Look for REITs that have a history of dividend growth. It’s safer to hedge your bets on a REIT in which other investors have confidence. Beginners should look for stocks that consistently pay large dividends that grow over time.
How Can You Invest in The Highest Yielding REITs?
REITs are some of the most accessible and simple investments, making them perfect for investors of all skill levels. Each REIT, under the right circumstances, offers a monthly dividend yield that becomes part of an investor’s cash flow. Publicly traded REITs are the easiest to access. All you have to do is create a brokerage account on a website like Fidelity. Then, link your bank account information with your investment account and buy REIT stocks.
To look for non-exchange traded REITs, you must find a broker specializing in them. No matter what path you choose, it’s best to work with a financial advisor to discuss your selections’ pros and cons.
The Best-Performing REITs as of October 2022
The most reliable REITS consistently pay large dividends that grow over time. These are publicly-traded stocks that are accessible to anyone with an investment account. Since the stock market is constantly in flux, this top-performing REIT list is fluid and must be regularly checked for updates.
- Bluerock Residential Growth REIT, Inc.
- First Real Estate Investment Trust of New Jersey, Inc.
- InvenTrust Properties Corp.
- LTC Properties, Inc.
- Farmland Partners Inc.
Working with an experienced financial advisor determines how much to invest, how long to hold your REITs, and what stocks to select. Always keep a steady pulse on your investments and know when to cash in and when to buy.
Real Estate Investments
When you partner with a nationwide brokerage like Marketplace Homes, you can discuss ways to boost your real estate portfolio. We can help you minimize risk by diversifying your portfolio by asset type while professionally managing rentals. Whether you’re a novice or a seasoned investor, our estate agents are ready to help you with your next steps. Contact us to find out how we can help you meet your investment goals!
Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.