REIT INVESTING
Overview
Real Estate Investment Trusts (REITs) let you invest in income-producing real estate — office towers, apartments, data centers, hospitals — without buying property. By law, REITs must pay out 90% of taxable income as dividends, making them one of the highest-yielding equity categories.
Setup
- 1.Understand REIT subtypes: Equity REITs (own properties), Mortgage REITs (own loans, riskier), and Diversified REITs.
- 2.Evaluate key REIT metrics: FFO (Funds From Operations), AFFO (Adjusted FFO), dividend payout ratio vs. FFO.
- 3.Screen for REITs with low leverage (Debt/EBITDA < 6x) and consistent FFO growth.
- 4.Use REIT ETFs (VNQ, SCHH) for broad exposure or build a mix of sector-specific REITs.
- 5.Hold REITs in tax-advantaged accounts when possible — dividends are taxed as ordinary income.
Max profit
High dividend yields (3-7%) plus property appreciation passed through as share price gains.
Max loss
Rising interest rates are REITs' biggest enemy — higher rates increase borrowing costs and make dividends less attractive vs. bonds. REITs can fall 30-40% in rising rate environments.
Breakeven
Purchase price minus accumulated dividends over the holding period.
When to use
When interest rates are stable or falling, in inflationary environments (real assets appreciate), and for investors needing regular income with real estate exposure.
When to avoid
When the Fed is aggressively raising rates. Avoid Mortgage REITs (mREITs) unless you understand their complex leverage and spread dynamics.