Whether you’re looking to diversify an investment portfolio, create passive income or simply want to invest in real estate without added hassle, real estate investment trusts (REITs) are often worth a look. Residential REITs may be right for investors looking to invest in residential property rather than commercial buildings, and include a variety of property types. Consider working with a financial advisor to ensure that any REIT investment you make is a good fit for your goals and risk profile.
What Is a Residential REIT?
REIT stands for “real estate investment trust,” which is an entity that holds a variety of real estate investment assets. This investment vehicle operates by selling shares to investors, who can buy into the trust rather than purchasing and managing their own individual properties.
Residential REITs are one available subset, which focuses on buying and managing residential properties. These may include:
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Single-family homes
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Multi-family homes, such as duplexes, triplexes or quadplexes
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Apartment buildings
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Townhomes or condominium complexes
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Student housing
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Manufactured homes
Some residential REITs focus on specific types of residential buildings, like high-rise apartments in metropolitan areas. Others might only focus on providing housing for specific groups of people, like building homes and condos for students in college towns.
The REIT itself will manage all aspects of the property it owns. This means buying land, developing, finding and managing tenants, facilitating repairs, paying taxes and even selling the property if and when it’s needed.
Benefits of Residential REITs
There are many reasons why investors might consider buying shares of a residential REIT. The most important is that they provide dividends to investors. Since REITs must pay out 90% or more of their taxable income to investors, these dividends can become a regular source of passive income for many.
Like all REITs, a residential REIT has the potential to appreciate in value over time. If it does, investors will also recognize gains down the line if and when they decide to sell their shares.
Many residential REITs trade on public stock exchanges. This makes them quick and easy to both buy and sell. This helps public REITs remain a relatively liquid investment for most investors.
With a residential REIT, investors can add a specific type of real estate investment to their portfolio. For example, investors who are looking towards metropolitan areas can invest in a REIT that focuses exclusively on high-rise condominiums.
Investors are able to buy into real estate interests without shouldering all of the responsibility; they don’t need to completely fund those real estate purchases or manage the properties themselves. Investors don’t need to worry about finding tenants, tracking property taxes or getting a call about a busted hot water heater at 2 AM, but they still benefit from the growth and income of the property.
The last, and perhaps biggest, benefit of residential REITs is that they allow investors to diversify their portfolio by adding real estate interests. This can help hedge against losses due to inflation or market downturns.
Downsides to Residential REITs
Of course, there are a few downsides to keep in mind before investing in residential REITs. The first is that the dividends earned through a residential REIT are taxed as ordinary income. Depending on your tax bracket and how much of a return your REIT investments provide, this has the potential to increase your tax burden throughout the year. However, all investments will affect your taxable income in the end.
The value of a REIT can be easily influenced by factors such as rising property taxes. If property taxes in an area increase, investors may see a decrease in dividend income or REIT value. Additionally, many REITs are also impacted by market interest rates. As average rates increase, REIT values have a tendency to decrease accordingly.
When speaking about residential REITs in particular, it’s important to keep occupancy and other market trends at the forefront. Residential property may be less in demand if a particular market is saturated with available rentals, for example.
In a buyers’ housing market, potential residents may also decide to buy a home rather than rent. This could easily impact REIT returns.
Where to Buy a Residential REIT
Many residential REITs are publicly traded and may be bought or sold on public stock exchanges. This means that investors can trade their shares with their existing broker or through their favorite brokerage platform, often with just a few clicks.
Some residential REITs can be public non-listed or privately traded. In this case, only eligible investors will be able to buy and sell shares. They will not be available for purchase on public exchanges.
These residential REITs are generally more difficult to sell, as well. This makes them more illiquid of an asset than publicly traded REITs.
Bottom Line
REITs in general allow investors to buy into real estate property without the hassle of sourcing, developing or managing that investment. With a residential REIT, investors can specifically choose to buy into companies that hold residential properties. This may include single-family homes, student housing or apartment complexes. Each can potentially grow the value of their investment and build a source of passive dividend income in the process.
Tips for Investing in REITs
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REITs are an intriguing investment product, but they can also be confusing to wrap your head around. Talking over your options with a financial advisor can help clarify the process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Want to take a look at what your portfolio will look like in a decade? SmartAsset’s investment calculator can help you do just that. Enter how much you have invested, how much you’re contributing and what rate of return you expect. We’ll then show you your investment growth five, 10 or even 30 years into the future.
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