Many millionaires have become wealthy by owning real estate in America, but what if you’re an investor like myself that doesn’t want anything to do with owning real estate for income purposes? Dealing with tenants, fixing items and collecting late payments are the kinds of headache-inducing things that come with real estate ownership. I found the answer to investing in real estate for investors like myself was to not own any tangible real estate outside of my primary home. And that brought me to the best real estate investment strategy for me, which is investing in Real Estate Investment Trusts (REITs). So what exactly is a REIT? A REIT is a company that owns, operates or finances income-producing real estate. To simplify, this is a publicly-traded company that manages real estate in different sectors such as hotels, apartments, mortgage loans, storage space warehouses and much more. Most REIT companies make their income through tenants, which is the same as any landlord would do with real estate.
Once a company successfully qualifies as a REIT, investors can buy shares the same way you can buy shares of Amazon or Apple stock on the market exchange. Here is an example of how REITs function:
- The REIT will make investments in different kinds of real estate. Assets can include the REIT’s direct ownership of real estate, real estate loans, or both.
- When the REIT (company) has taxable income they tend to pay quarterly dividend payouts.
- The process continues for years with the REIT paying out consistent dividends. For example, Welltower, a healthcare REIT, has paid out consistent dividends for the past several years.
For many REITs, an investor should not expect high growth in stock value. After all, the company only has 10% of their taxable income to grow since the other 90% is paid out in dividends to shareholders. However, there are some niches in real estate that have provided a fantastic boost. There are currently 13 sectors of REITs that exist. Below are the more popular sectors.
Retail Sector
Retail REITs own and manage retail real estate and rent space in those properties to tenants. Typical spots can be large regional malls, outlet centers and grocery-anchored shopping. Simon Property Group (SPG) is a popular REIT that owns over 200 malls across the country! During COVID, this industry was hit the hardest due to low occupancy rates and tenants having to close shop. Since then, they have confirmed occupancy and foot traffic is close to pre-COVID times. Another retail REIT, O Realty (O), focuses on anchored shopping (typically grocery or drug stores used to attract people), which is considered recession proof. Grocery stores rarely close, and people will continue to need food and pharmacy items. A big plus for this sector is that tenants will pay both rent and many operating expenses for a property, making it a win-win situation for the REIT. Specific retail REITs such as EPR held many AMC buildings during unpredictable times, and investors became concerned if the AMC company would still be in business in 2019. If the company lost a large client then it would have a negative impact on income. That is why it’s always important to research a REIT’s real estate portfolio.
Sector stats as of September 2021 are the following:
- Number of REITs: 30
- Dividend Yield: 4.21%
- Year-to-Date Return: +32.11%
Self Storage
In the past, you probably used a storage space for extra items during the middle of a move or to store extra items. A few popular storage sites are Public Storage, Cubesmart, Life Storage and Extra Space Storage. They are also REITs and feature low overhead costs since maintaining storage units requires few employees. Storage facilities continue to pop up through America as the demand for storage continues to climb. But beware, because if demand falls, these storage units will struggle since there isn’t much use outside of storage for the units. Luckily, current and future demand is still high, though the risk of oversupply still exists.
Sector stats as of September 2021 are the following:
- Number of REITs: 5
- Dividend Yield: 2.78%
- Year-to-Date Return: +39.06%
Health Care
Hospitals, medical office buildings and nursing homes are other REIT areas that most people don’t realize exist; after all, a hospital is still a business. Like grocery-anchored retail, this is another prime example of tenants who will continually receive foot traffic and likely never close. Health care REITs such as Welltower have done well for decades by growing their real estate portfolio to:
- 282 senior housing buildings
- 369 outpatient medical office buildings
- 216 properties leased to health systems
- 135 long-term post-care properties
The sector took a hit due to COVID like other sectors have, but they are recovering as more of the public becomes vaccinated. An investor should know that a hospital’s capacity can be reached due to surging numbers of COVID patients. In this event, elective surgery, which is highly profitable, can be postponed until more beds are available. Outside of a COVID resurgence risk is the upcoming possibility of oversupply in the industry. While baby boomers are set to retire over the next few years, the next generation is much smaller and will likely need fewer senior home buildings. It comes down to whether the REIT can properly balance supply and demand without adding too much supply.
Sector stats as of September 2021 are the following:
- Number of REITs: 16
- Dividend Yield: 4.22%
- Year-to-Date Return: +10.50%
Infrastructure Sector
A booming industry as of late is the push to connect everyone to the higher-speed 5G network. Gartner Inc. predicts worldwide 5G network infrastructure revenue is on pace to grow 39% to a total of $19.1 billion, up from $13.7 billion in 2020. Among others, this one prediction is why infrastructure REITs have been producing high stock returns in the past few years. Infrastructure sector companies own and manage the land or the real estate for paying tenants. Typical tenants include fiber cables, wireless infrastructure, telecommunications towers and energy pipelines. Telecommunication (cell) towers have been a growing segment among the three cell tower REITs:
- American Tower Corporation
- Crown Castle International
- SBA Communications Corp
A growing 5G industry is essential for the self-driving car initiative as the connection needs to be instantaneous for vehicles to avoid accidents on the road. However, the sector has its risks, including interest hikes and regulatory risks due to heavily regulated real estate. Overall, this can be an investment for steady income plus growth potential with minor troubles.
Sector stats as of September 2021 are the following:
- Number of REITs: 4
- Dividend Yield: 2.16%
- Year-to-Date Return: +16.59%
Data Centers
The internet connects millions upon millions of people today. Large companies adapted to the new age of technology, including keeping data safe in the new world. The key thing to remember is this sector is still growing as the need for secure and reliable data storage exploded in the past two decades. In addition, the artificial intelligence market is expected to grow, as earlier discussed. Datacenter traffic is expected to grow 25% per year through at least 2021, according to Cisco. One advantage is the need for data centers will remain whether the economy does well or dives. If consumers stay connected, the demand for these REITs will remain. And the possibility of oversupply in the industry still serves as a common risk since demand can fall as technology becomes more advanced.
Sector stats as of September 2021 are the following:
- Number of REITs: 5
- Dividend Yield: 2.21%
- Year-to-Date Return: +10.09%
REITs are an excellent way to invest in real estate without the hassle of owning tangible property. Plus, steady income is typical for these investments. An intelligent, independent investor should always do their research before buying or seek out professional help. Happy investing, neighbors!
Andre Albritton, a graduate of Florida A&M University, has become a nationally recognized investing nerd who trains people on building wealth through the stock market and REITs. He is the founder of The Millennials Next Door, a community dedicated to millennials building wealth to create financial freedom. In addition, Andre created the Flavor Podcast, a venture focused on the many different flavors of investing within stocks, real estate and entrepreneurship. Andre is now a household name for ambitious millennials who are ready to reach and redefine wealth.
