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What is a Real Estate Investment Trust?

A real estate investment trust (REIT) is a corporation, trust or association that owns and manages a portfolio of real estate properties and/or mortgages. REITs are considered to be alternative investments and by many, to be the best way to invest in real estate. They can be available either in the form of mutual funds or exchange traded funds (ETFs).

What is a REIT ETF?

A REIT ETF is an exchange-traded fund (ETF) that invests most of its assets in equity REIT securities and derivatives. REIT ETFs are passively managed investments that mirror an index of publicly traded real estate owners. The two most frequently used benchmarks are the MSCI U.S. REIT Index and the Dow Jones U.S. REIT Index.

What are the pros and cons of REITs?1

As with all investments, REITs have pros and cons that you should consider before making any investment decisions:

Pros

Cons

REITs must pay out at least 90% of taxable income as dividends, so they provide a reliable cash flow to investors.

Because REITs must pay out at least 90% of taxable income as dividends, they’re left with little capital that could be used to renovate or acquire new properties.

REITs are sold openly on stock exchanges, so you can buy and sell REITs like stocks from your broker or financial advisor.

Dividends from REITs are taxed as ordinary income.

REITs are known for delivering attractive risk-adjusted returns.

Like with any investment, there’s market risk involved. REITs can’t guarantee profits, and losses are possible.

The SEC regulates REITs as securities, and they’re required to produce audited financial reports.

If a REIT distributes income to a non-unitholder, it’s subject to standard dividend taxes. If a REIT gains income by selling a property, a capital gains tax applies.

REITs are a diversified investment because they invest in a broad basket of real estate holdings, thereby mitigating risk. Their value has a low correlation to other stocks and bonds.

Some REITs include high management and transaction fees.

Which REITs are best?

There are several types of REITs. Most are traded on major stock exchanges, just like other types of stocks. Like real estate itself, REITs help diversify a portfolio through a vehicle that seeks to provide current returns with long-term growth potential, since real estate income historically has kept pace with inflation.*

  • Equity REITs: The majority of REITs are equity REITs, which own and operate real estate ventures directly. Their revenues are derived from tenants’ leases or rent payments, which are then distributed to shareholders as dividends. If a REIT liquidates property holdings, shareholders receive capital appreciation in the form of dividends.
  • Mortgage REITs: A mortgage REIT is involved in financing real estate. It may invest in and own residential mortgages, commercial mortgages, residential mortgage-backed securities (RBMS ) or commercial mortgage-backed securities (CMBS).
  • Hybrid REITs: A hybrid REIT owns and operates properties while investing in mortgages and/or mortgage-backed securities.
  • Traded vs. Non-Traded: Most REITs are traded publicly and are more liquid than non-traded REITs, with lower upfront fees.

How risky are REITs?

As with any other type of investment, there are potential risks to consider before investing in REITs:

  • Declining value properties: When choosing a REIT, consider the growth prospects of the industries, property types or geographical locations they’re targeting.
  • Fees: What “wrapper" are your investments in, and what are the associated costs? For instance, non-traded REITs generally have significantly higher upfront fees than publicly traded REITs and may have early withdrawal penalties. Non-traded REITs may also include high external management fees that diminish dividends.
  • Interest rates: Rising rates can be a double-edged sword when it comes to investing in REITs. If higher rates are driven by growth in the underlying economy, inflation is passed along in the form of higher rents, which creates income growth for the investor. Conversely, if interest rates rise without economic growth (i.e., stagflation), other classes of real assets may face diminished returns.
  • Lack of information: If you invest in a non-traded REIT, you may not be able to access data about the REIT's assets, value, management team and overall performance prior to investing.

Myths about REITs

Myth #1: You have to be rich to invest in real estate.

Truth: Buying property often comes with a sizable monetary investment. However, nearly any investor can invest in Real Estate Investment Trusts, regardless of portfolio size, because of REITs’ availability in investments such as mutual funds and exchange traded funds.

Myth #2: A REIT is the same as investing in real estate.

Truth: REIT shareholders do not own the property or mortgages represented in its portfolio. As a result, because Real Estate Investment Trusts aren’t direct investments in real estate, shareholders also avoid the headaches many property owners and managers experience, such as maintaining or developing the property, providing landlord services, or collecting rent payments.

Myth #3: REITs perform poorly when interest rates go up.

Truth: Historically, some REITs have experienced diminished performance in the face of higher interest rates. However, many REITs have outperformed other investments, despite high interest rates. In addition, REITs often outperform other stocks in a slow economy because real estate often appreciates in value.

How do I invest in REITs ?

You can buy REITs through your broker. Over 200 REITs are publicly traded on stock exchanges. This includes REIT mutual funds and REIT exchange-traded funds (ETFs). If you want to buy shares of a non-traded REIT, ask a broker or financial advisor who participates in the non-traded REIT’s offering.

REITs can represent an attractive stand-alone or starter investment, or as a complement to diversify a portfolio. When choosing a REIT, consider:

  • Past performance: How well has the REIT performed most recently and over time? If it has performed well, have there been any recent changes to the management team that might change its performance in the future?
  • Composition: Does the REIT represent industries or geographical areas that are growing or are likely to decline in coming years?
  • Transparency: How much information is available about the REIT's past performance, composition, management team and fees?
  • Timing: What’s your investment timeline? Are you most interested in an investment with the potential to gain rapidly over the short term, or one that’s more stable and whose growth potential is likely to occur over time?

What REIT products are offered by BlackRock?

BlackRock offers several REIT products, two of which are REIT ETFs. These products seek to:

  • Produce tangible income in the form of dividends
  • Offer tax advantages
  • Strengthen a portfolio by providing expanded diversification and stronger asset allocation as a hedge against market downturns
  1. USRT: iShares Core U.S. REIT ETF
    • Offers low-cost access to diversified U.S. REITs
    • Seeks to track an index that aims to provide income and growth with broad exposure to U.S. real estate across property sectors
    • Can be used at the core of a portfolio for long-term exposure to U.S. real estate.
  1.  REET: iShares Global REIT ETF
    • Delivers broad index-based exposure to international REITs
    • Provides access to income-oriented real estate
    • Can be used to diversify your portfolio, seek income or express a sector view
  1. BIREX: Real Estate Investment Securities Fund
    • Invests at least 80% of its assets in equity securities of U.S. companies that derive at least 50% of revenues or profits from commercial, industrial or residential real estate industries, or with 50% of assets in real estate interests.
    • The fund may invest up to 20% of its assets outside the United States.