Best REITs to Invest in December 2024

If you want to diversify your portfolio beyond the usual stocks and bonds, consider a real estate investment trust—or REIT (rhymes with neat). A REIT is a company that owns and operates a portfolio of income-generating properties, such as apartment buildings and retail centers. The best REITs pay healthy dividends and let you tap into the real estate market without having to buy, manage, or finance property on your own.

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Fees

1% to 1.25% management fees (additional fees may apply); Income REIT has a 4.5% maximum fee, and Apartment Growth REIT has a 4.75% maximum fee

Min. deposit

$5,000

Best-performing REIT stocks: March 2024 (Data from Nareit)

Here are the top five performing publicly listed REITs in March 2024:

Source: Nareit, as of market close 3/25/24

Instead of investing in single REITs, you can buy a REIT mutual fund or REIT exchange-traded fund (ETF), which can provide a low-cost way to diversify your portfolio. Here are some of the top performers over the last year:

Best-performing REIT mutual funds: March 2024

Source: Morningstar

Best-performing U.S. REIT ETFs: March 2024

Source: ETF.com

How to pick the best REIT

There are a few important factors to consider when choosing REITs for your portfolio. Start by researching dividend yield and dividend history. A single large dividend is less impressive than a history of increasing dividends.

Next, you'll want to look at the company's financials, including gross revenue, expenses, profits, and funds from operations (FFO). FFO measures a REIT's net cash from its regular, ongoing business activities. To calculate FFO, add depreciation, amortization, and losses on property sales to net income and subtract gains on property sales and interest income. The outcome can give you a better idea of the REIT's operating performance.

After that, consider the type of property the REIT invests in, its location, and the investment objective to ensure it aligns with your goals and can diversify your portfolio. According to the National Association of Real Estate Investment Trusts (Nareit), multiple studies have found the optimal REIT portfolio allocation may be between 5% and 15%.

Alternatively, consider REIT-centric mutual funds and ETFs if you'd prefer not to invest in individual REITs.

Alternatives to REITs

REITs offer one of the easiest ways to invest in real estate, but there are other options. If you prefer a more active approach, you might consider rental properties, house flipping, or house hacking—where you rent out part of your home.

Other possibilities include online real estate investing platforms (aka "crowdfunding") and real estate investment groups (REIGs). Investing platforms match developers with interested investors to fund real estate projects. Investors receive equity or debt in the project, plus monthly or quarterly distributions. A REIG is a club of private investors who pool their money and expertise to buy income-producing properties. They can be an excellent option if you like the idea of owning rental properties but want to avoid having sole responsibility for managing and financing them.

REITs versus real estate

Investors have many options for investing in real estate, including REITs and private real estate ownership.

The options move along an active versus passive continuum, and each comes with risks and opportunities, says Scott Trench, CEO of BiggerPockets, host of BiggerPockets Money, and author of Set for Life.

"Real estate investing is a huge spectrum of opportunity that can mean anything from owning raw land, to owning rental properties, to commercial assets like offices or retail properties, and beyond," says Trench. "The landscape, returns, and risk profile vary dramatically by property type and market."

Trench adds that REITs offer the advantages of being highly liquid, professionally managed, and, in some cases, offering large amounts of diversification.

"For many investors who lack capital," Trench explains, "there are few realistic opportunities to get exposure to certain types of commercial real estate, like multifamily apartments, office, or retail, without investing in a REIT."

REITs can be an excellent option if you want exposure to the real estate market but lack the time, interest, or expertise to choose and manage properties. REITs also make sense if you don't have the money (or can't get the financing) to purchase real estate.

REITs versus rental property

"REITs and direct ownership of rental properties both offer great opportunities to investors," says Dave Meyer, author of the upcoming real estate investing book Start with Strategy.

Meyer says rental properties are often preferred by investors willing to actively participate in their investments to maximize their returns. At the same time, REITs tend to be better for investors who want to invest more passively and are willing to give up some return potential for that convenience.

On the other hand, rentals offer investors willing to be more active a few excellent advantages, says Trench. For example, rentals enable you to use more—and very favorable—leverage. "Many investors can borrow up to 75% or even 85% on a single-family rental property, which increases returns," says Trench. He adds that rental property owners can self-manage or creatively add value to the property, which can be a high dollar-per-hour return on their time.

Additionally, personal ownership offers the chance to achieve personal objectives. "Many investors like to see the high leveraged returns of rental property investing in their early careers, and then pay off the property, owning them free and clear, to drive stable, sleep-well-at-night cash flow in traditional or early retirement," says Trench.

More about REITs

What is a REIT?

Modeled after mutual funds, REITs are companies that own or finance (and often operate) income-producing real estate, such as apartment complexes, cell towers, data centers, hotels, medical facilities, retail centers, and warehouses. Most REITs focus on a specific property type, though some hold various kinds of real estate in their portfolios.

How do REITs work?

The two main REIT types are equity and mortgage REITs (aka mREITs). Equity REITs own or operate income-producing properties, while mREITs provide financing for income-generating real estate.

A majority of REITs make money by leasing space and collecting rent. The company's income is paid out to shareholders as dividends. To qualify as a REIT, a company must distribute at least 90% of its taxable income to shareholders each year.

A company qualifying as a REIT can deduct the dividends it pays shareholders from its corporate taxable income. For this reason, most REITs pay at least 100% of their taxable income, thereby eliminating their corporate tax liability. However, REIT investors pay income taxes on the dividends and any capital gains they earn.

Most REITs trade on major stock exchanges, where investors can buy and sell shares throughout the market session. Public non-listed REITs (LNLRs) don't trade on stock exchanges but are nonetheless registered with the Securities and Exchange Commission (SEC). Private REITs neither trade on stock exchanges nor are registered with the SEC.

Pros and cons of investing in REITs

How to invest in REITs

You'll need a brokerage account to buy and sell publicly-traded REITs, REIT mutual funds, and REIT ETFs. Brokerage firms like TradeStation, Robinhood, and Public generally offer a large selection of REIT and REIT-focused investments. For other REITs, you can go through a crowdfunding platform or financial advisor, such as J.P. Morgan Personal Advisor or Empower. SmartAdvisor from SmartAsset offers an online matching tool to help you find the best advisor for your needs and goals.

TIME Stamp: REITs can be an excellent way to save for retirement

Commercial real estate is the third largest asset class in the U.S. investment market, behind stocks and bonds. REITs offer a low-cost, liquid way to tap into this asset class without the hassle and costs of buying, operating, or financing physical properties. REITs also provide portfolio diversification opportunities with a relatively low correlation to the broad stock market.

According to Nareit, about 150 million Americans live in households invested in REITs through a 401(k), IRA, pension plan, or other investment fund. REITs also appear in nearly 100% of target date funds, a popular investment option in 401(k)s and IRAs.

The income from REITs can be high, and most REIT dividends are nonqualified, meaning they're taxed as ordinary income instead of dividends. For this reason, REITs are particularly well-suited for Roth IRAs, where your investment can grow tax-free, with qualified withdrawals in retirement tax-free as well.

Frequently asked questions (FAQs)

What is the average return rate of REITs?

Analysis from Nareit shows that REITs generally outperform the broader U.S. stock market more often than not when returns are measured in years. And the longer the time horizon, the better REITs perform compared with stocks. From 2013 to 2022, the average total return for all equity REITs was 8.7%. Over the long term—from 1972 to 2021—the average REIT return was 11.9% versus 10.7% for the S&P 500 over the same period.

Are REITs a good investment?

REITs offer numerous benefits, including diversification, liquidity, a history of solid performance, and healthy dividends. Because REITs must pay out at least 90% of their taxable income to shareholders yearly, they are often among the companies paying the highest dividends.

"REITs are a potentially good way to get highly liquid exposure to the real estate market," says Trench. REITs have fallen precipitously from peak pricing in 2021 and early 2022.

"Interestingly, the price of REITs in some instances may have fallen more than the price of the underlying assets—although transaction volume in some markets is so low that it is hard to value certain types of commercial property at the moment," he says.

Trench says it's arguable that while REITs are risky, they're currently less risky than other types of investments because prices have fallen dramatically from their peak. "Of course, each REIT is unique and requires analysis by the investor prior to making an investment decision."

Do REITs pay high dividends?

By law, REITs must pay out at least 90% of their taxable income to shareholders as dividends each year—making them a popular option for investors wanting a historically steady income stream. According to Nareit, the high dividend payout requirements for REITs means a larger share of investment returns come from dividends compared to stocks: Over the long term, about half of REIT returns come from dividends compared to less than a quarter for the S&P 500.