Benefits and Risks of Investing in REITs

Real estate investment trusts (REITs) have become a popular investment option due to their attractive dividend yields and potential for long-term growth. These trusts invest in income-generating properties such as commercial buildings, apartments, and shopping centers. By investing in a REIT, an individual can access real estate without physically owning property. REITs must distribute at least 90% of their taxable income to shareholders in the form of dividends, which provides an opportunity for passive income. They also offer diversification in a portfolio with their broad range of properties and low correlation with other asset classes. Additionally, REITs can provide protection against inflation as rental income and property values tend to increase with inflation. However, investing in REITs comes with risks, including market risk, interest rate risk, property-specific risk, and regulatory risk. It’s important to understand these risks and choose the best way to invest in REITs, whether through individual REITs or through a REIT mutual fund or ETF, to make the most of this investment opportunity. Overall, REITs can be an excellent addition to a portfolio for those seeking diversification, passive income, and potential for long-term growth.

Types of REITs

There are three main types of REITs:

  • Equity REITs: These REITs invest in and own properties such as office buildings, apartments, and shopping malls.
  • Mortgage REITs: These REITs invest in and own mortgages on income-generating real estate properties.
  • Hybrid REITs: These REITs invest in both properties and mortgages.

Each type of REIT has its own benefits and challenges:

  • Equity REITs: These tend to offer higher dividend yields, but they are more sensitive to economic conditions and have less protection against interest rate increases.
  • Mortgage REITs: These tend to offer higher potential capital appreciation, but they are more sensitive to interest rate fluctuations and default risk.
  • Hybrid REITs: These offer both the benefits and drawbacks of equity and mortgage REITs.

When investing in REITs, it’s important to consider the type of REIT that best aligns with your investment objectives and risk tolerance.

Some resources for analyzing and comparing different REITs include:

What are the 3 types of REITs?

There are three main types of REITs:

  • Equity REITs
  • Mortgage REITs
  • Hybrid REITs

Equity REITs invest in and own physical properties such as apartment buildings, shopping centers, and office buildings. They generate income primarily through renting out these properties.

Mortgage REITs, on the other hand, invest in mortgages and mortgage-backed securities. They make money from interest on these investments.

Hybrid REITs invest in both physical properties and mortgages or mortgage-backed securities.

If you’re interested in investing in REITs, it’s important to understand the differences between these types and their potential risks and rewards. Make sure to do your research and consult with a financial advisor before making any investment decisions.

If you’re looking for more information about real estate investing, websites like BiggerPockets and Investopedia offer helpful articles and tools for beginners.

Advantages of Investing in REITs

Investing in REITs offers several advantages:


Passive Income

Potential for Growth

  • REITs offer diversification by investing in a broad range of properties in different geographic locations and sectors.
  • They may provide stability by performing better than other investments during certain market conditions, such as inflation or recession.
  • REITs are required to distribute at least 90 percent of their taxable income in the form of dividends to shareholders.
  • They can offer higher dividend yields compared to other equities or bonds, which makes them an attractive alternative for income-oriented investors.
  • Many REITs have a track record of delivering long-term capital appreciation to investors.
  • They offer exposure to one of the largest and most fundamental sectors of the global economy, which means that they have the potential to grow as the population and economy expand.

Some interesting facts about REITs include:

  • The first REIT was created by the U.S. Congress in 1960 to enable small investors to invest in large-scale, income-producing real estate.
  • REITs encompass more than $3 trillion in gross real estate assets in the U.S. and around $1.5 trillion in gross real estate assets globally.
  • REITs provide jobs and support economic activity by employing millions of workers in fields such as construction, property management, and leasing.

Why are REITs good for diversification?

REITs (real estate investment trusts) are a popular investment option for those looking to diversify their portfolio. Here’s why:

  • REITs invest in a variety of real estate properties, including apartment buildings, shopping centers, and office buildings. This diversifies your portfolio beyond traditional stocks and bonds.
  • REITs typically provide higher dividend yields than other equities, providing an additional source of income.
  • REITs offer exposure to the real estate market without the hassle of owning and managing physical properties.

If you’re interested in investing in REITs, check out websites such as Nareit or for more information.

Risks of Investing in REITs

Investing in REITs comes with risks that you should be aware of:

Market Risk

Interest Rate Risk

Property-specific Risk

Regulatory Risk

  • REITs, like other types of investments, are subject to market risk, which means that their value can decline due to factors beyond the company’s control, such as economic conditions or geopolitical events.
  • Even if the company performs well, there can be volatility in the stock price due to the overall market fluctuations.
  • REITs that invest in mortgages (mortgage REITs) can be exposed to interest rate risk, which means a rise in interest rates can cause the cost of borrowing to increase, and make it difficult to achieve the targeted return on investment.
  • They can also face refinancing risks if their mortgages come up for renewal at unfavourable interest rates.
  • REITs that invest in properties (equity REITs) can be exposed to property-specific risks, which include natural disasters, environmental contamination, tenant defaults, and changes in local zoning and building codes.
  • These risks can impact the value of both the underlying asset and the REIT itself.
  • REITs can be impacted by changes in tax laws, accounting practices, or regulations imposed by government agencies.
  • Changes in these regulatory requirements can limit the REIT’s ability to operate and impact returns.

Investors should understand the potential downside of investing in REITs, but also remember that these risks are not unique to REITs and should be weighed against the potential benefits.

What types of risks are associated with REITs?

Some of the risks associated with Real Estate Investment Trusts (REITs) include:

  • Interest rate risk: REITs are sensitive to changes in interest rates, which can impact their borrowing costs and affect the performance of their properties.
  • Market risk: Like any other investment, REITs are also subject to market fluctuations. A decline in the real estate market can lead to a decrease in the value of the properties held by the REIT, resulting in a decline in the value of the shares.
  • Liquidity risk: REITs are not as liquid as other investments, as they are traded on the stock exchange and may not necessarily have a constant demand from buyers.

Investors should carefully consider these risks before investing in REITs.

(If relevant: Our website/product offers comprehensive information on REITs and their associated risks, helping investors make informed decisions.)

How to Invest in REITs

There are several ways to invest in REITs:

Individual REITs

  • Investors can purchase shares of a specific REIT directly.
  • This approach offers greater control over the portfolio but requires more knowledge of the individual REIT before making the investment.

REIT Mutual Fund or ETF

  • Investors can purchase shares of a mutual fund or ETF that specializes in REITs.
  • This approach offers diversification by investing in multiple REITs and is more suitable for those who don’t want to select and monitor individual REITs.

REIT Index Fund

  • Investors can purchase shares of an index fund that tracks a broad REIT index.
  • This approach offers even more diversification by investing in a basket of REITs with low fees.

Before investing in REITs, it’s essential to consider your investment goals, risk tolerance, and investment horizon. A financial advisor can also provide guidance on selecting the right approach for your situation.

How many REITs should I own?

There is no one-size-fits-all answer to this question, as the optimal number of REITs to own depends on your individual investment goals, risk tolerance, and portfolio size. However, here are some things to consider:

  • Diversification is key. If you are looking to reduce risk, owning a variety of REITs across different sectors and geographic regions can help safeguard your portfolio against any individual REIT’s underperformance.
  • Aim for around 10-15 REITs. Owning too few REITs may leave you vulnerable to concentration risk, while owning too many may dilute your returns.
  • Consider investing in a REIT ETF or mutual fund. These funds offer exposure to a diversified portfolio of REITs, and can make it easier to achieve the appropriate level of diversification for your portfolio size and risk tolerance.

For more personalized advice, it may be helpful to consult with a financial advisor or utilize a robo-advisor platform, such as Betterment or Wealthfront.


Investing in REITs can be a smart way to diversify your portfolio and earn passive income. Whether you choose to invest in individual REITs or use a mutual fund or ETF, it’s essential to consider your investment goals and risk tolerance. Make sure to do your research and select quality REITs with a strong track record and a well-diversified portfolio.

While REITs offer many benefits, they also come with risks, such as market risk and regulatory risk. It’s vital to understand these risks and how they can affect your investment. By taking a prudent and informed approach to REIT investing, you can achieve your investment goals while minimizing risk.

If you’re looking to build an income-generating portfolio, REITs can be a great addition to your investment strategy. Consult with a financial advisor or do your research to determine the best approach to adding REITs to your portfolio.

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