Publicly traded real estate investment trusts are like mutual funds that own commercial, residential or industrial property, or mortgage securities, instead of stocks and bonds. They pass to investors rental income, gains from properties that are sold, or payments received on loans in mortgage-backed securities.
REITS can produce capital gains, though steady dividend income is usually the main attraction. They avoid taxation at the corporate level by passing at least 90 percent of earnings to shareholders.
At the end of 2017, there were 220 "equity" REITS, and 41 mortgage REITs – with total assets of just over $1 trillion, according to NAREIT, the industry trade group.
Some REITs pay pretty well. Ares Commercial Real Estate Corp. (ACRE), for example, yields just over 8 percent.
But as with many other fixed-income investments, REIT prices can fall when rising interest rates make older investments less generous than newer ones. While this can be offset as the REIT raises rents on tenants, and as newer mortgage securities offer higher yields, there may be a lag, and experts say these assets are best for investors who can wait out the downturns and are diversified with other types of assets like stocks and bonds.
"For a passive real estate investor, the best investment would be in a publicly traded REIT index or [REIT] mutual fund with low fees," says Jeremy Salzberg, a partner at Sugar Hill Capital Partners, a private equity real estate firm In New York City.
REITS are traded like stocks and therefore are very easy to buy and sell, a chief advantage over owning investment property directly. They are professionally managed, and since the fund owns numerous properties it is diversified. But you don't have the control you would by owning a property yourself.
Brian Finkelstein, CEO at Broad Financial in Monsey, New York, recommends buying REITS in tax-favored accounts like IRAs, ROTH IRAs or 401(k)s to avoid annual income tax on dividends that are reinvested, and he says REITS are not especially good for investors seeking long-term growth because REIT share prices generally don't grow very fast. Income-oriented investors can start receiving interest earnings right away, as payouts typically come every quarter.