Real estate investment trusts can be easy way to invest in real estate

Despite headwinds in 2024, there are “lots of opportunities” in REITs: Ron Kamdem of Morgan Stanley

Some Americans believe that real estate is the best long-term investment. If you're one of them, real estate investment trusts (REITs) may be the easiest way to tap into the market.

Around 36 percent of Americans surveyed rated real estate as the best long-term investment, ahead of stocks or mutual funds (22 percent), gold (18 percent) and savings accounts or certificates of deposit (13 percent), according to a recent survey by the global analysis and consulting firm Gallup.

The report found that fewer adults surveyed (4% and 3% respectively) believe that bonds and cryptocurrencies are good long-term investments.

The company surveyed 1,001 American adults in telephone interviews from April 1 to 22.

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For people who see long-term investment potential in real estate, REITs can be a good entry point because they have “low barriers to entry,” says Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York City.

A REIT is a publicly traded company that invests in various types of income-producing residential or commercial real estate. In many cases, you can buy shares in publicly traded REITs like stocks or shares in a REIT mutual fund or exchange-traded fund. REIT investors typically make their money through dividend payments.

Some “you can invest in for as little as $25,” says Francis, a member of CNBC’s Financial Advisor Council.

“Shares do not trigger excessive emotions in anyone”

Real estate is a popular investment option for some Americans because, unlike stocks and bonds, it can evoke emotions and feelings, Francis said.

“Nobody gets overly emotional about stocks,” she said. “But with real estate, some people definitely get emotional.”

Some people see it as a legacy they want to leave to their children.

“Instead of giving them a stock portfolio, I want to give them a physical home that they can use,” Francis said as an example.

But buying a property and acting as a landlord requires a significant investment of money and time, more than other types of portfolio assets.

“It's not easy being a landlord,” says CFP Kashif Ahmed, president of American Private Wealth in Bedford, Massachusetts. “There's a lot more to it than just getting a monthly check.”

When you buy a property and make an investment in it, you need to manage it, insure it properly and be able to maintain it.

Whether you do it yourself or hire someone to manage the property on your behalf, it can cost money, explains Ahmed.

REITs can also offer diversification opportunities. Depending on the company, you have exposure to hundreds or even thousands of different properties or regions, experts say.

You can also invest in different types of real estate, such as shopping malls, warehouses and office buildings. However, if you invest in a region or sector that is experiencing devaluation, this price decline will be reflected in your portfolio.

“If there's a REIT investing in malls across the country and the malls aren't doing well … you're going to feel it,” Francis said. “You're not going to be protected.”

How many properties should be in your portfolio

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If you really want to use the real estate market as a long-term investment, “you should do your research on these funds,” Francis explains.

REITs should also help diversify your portfolio, but “they shouldn't be everything,” Francis said. Some advisors recommend that REITs make up no more than 25% of your portfolio, she said.

Consider how the REIT will affect your tax situation. REITs often pay out 90% or more of profits in dividends, which can be subject to ordinary income taxes, experts say.

“It’s as if these dividends were coming to you along with your paycheck at work,” Francis said.

If you don't need the extra income, try putting the REIT into a tax-advantaged account such as an individual retirement account, Ahmed said.

“The location of assets is important,” he added.

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