Residential REITs: What They Are And How To Invest

Want to invest in residential real estate but don’t have enough cash to purchase an investment property, or enough savings to afford the monthly mortgage payments?

Maybe you don’t have the time to manage different real estate investments or aren’t handy enough to repair and renovate an aging property?

Fortunately, you can invest in single-family homes or apartment properties without worrying about these challenges by buying into real estate investment trusts, otherwise known as REITs.

What Is A Residential REIT?

Real estate investment trusts (REITs) are investment vehicles made up of financial contributions from several investors. Each of these investors contributes money to the REIT. The REIT then uses this money to purchase real estate. This gives investors with less cash or savings the opportunity to invest in properties that are normally out of their financial reach.

REITs give people the chance to invest in real estate even if they don’t have enough cash to buy a property on their own. Residential REITs also give investors the chance to buy into real estate without having to take out a large mortgage loan. You might not have enough money to buy an industrial warehouse or office building, but you may have the opportunity to invest in a REIT.

Residential REITs Vs. Standard REITs

A residential REIT differs from a standard REIT because it’s only used to purchase residential properties. The properties that a residential REIT might purchase include single-family homes, student housing, apartment buildings, manufactured housing, condos, and townhomes.

How Do You Make Money From Residential REITs?

Apart from understanding what residential REITs are, it’s also important to understand how they can be profitable. Investors make money on REITs in two ways.

Dividend Payments

First, residential REITs make dividend payments to investors on a regular basis. The size and timing of these payments will depend on the performance of the REIT and the payment schedule set by the REIT. Investors also make money by holding onto their REITs and selling them after they’ve increased in value. Of course, there’s no guarantee that a specific REIT will increase in value, as with any investment.

New York Stock Exchange Trades

Public residential REITs are traded like stocks on the New York Stock Exchange and are fairly simple to invest in. Investing in REITs can help diversify your investments and provide a financial offset for losses your investments in stocks, bonds and mutual funds might suffer. Your investment in a REIT might rise when some of your other investments see their value fall – but that’s not guaranteed.

You should consult a financial advisor before undertaking any investment.

What Is A Residential REIT ETF?

Exchange-traded funds, more commonly known as ETFs, are securities made up of different stocks and bonds that can be purchased or sold on a stock exchange, much like any other type of stock.

A residential REIT ETF is a REIT focusing on residential properties. REIT ETFs are attractive because they include several individual REITs within them. They’re a bit like mutual funds. If you invest your dollars in a REIT ETF, you’re buying into several REITs and not just one residential REIT.

Pros Of Investing In Residential REITs

As with any investment, there are both positives and negatives associated with investing in residential REITs. Let’s start by exploring some potential benefits of investing in residential REITs.

Diversification

It makes sense to diversify your portfolio of investments. Investing in residential REITs is one way to do this. Maybe your investments in the stock market are slumping, but the housing market might be performing well. If you’ve invested in a residential REIT, at least a portion of your investment portfolio will be on the rise. Diversifying your portfolio protects you against the normal ups and downs of the economy.

Recession Resistance

Residential REITs are one of the more recession-resistant investment vehicles. People still need homes to live in even if the economy is in a recession. They still need apartments to rent even if unemployment is rising. Because of this, the value of residential REITs often stays solid or even increases during economic slowdowns. Again, as with all investments, there’s no guarantee that the value of a residential REIT will increase.

Dividend Payments

REITs are required by federal law to pay out 90% of their taxable income to shareholders. Because of this, their dividend payouts are often higher than what investors receive when they invest their dollars in stocks.

Cons Of Investing In Residential REITs

As a real estate investor, you might also experience certain drawbacks of buying and managing REITs. Let’s take a look at some of the cons.

Tax Drawbacks

REIT dividend payments are rarely considered qualified dividends by the IRS. This means that these dividends are taxed at a higher rate than the dividends paid out by other investment vehicles. This could leave you with a higher tax bill. Speak with a tax advisor to make sure you understand your individual liability.

Interest Rate Fluctuations

The performance of REITs often suffers when interest rates rise. For instance, if the Federal Reserve raises interest rates, the value of REITs could tumble.

Rising Property Taxes

States have the power to increase property taxes, a tool they often turn to when they need more revenue for their budgets. When property taxes rise on the properties that a residential REIT has invested in, the earnings on these REITs will fall.

When Is The Right Time To Invest In Residential REITs?

If you’re considering investing in residential REITs, it’s important to know when the time is right to do so. There are a few indicators that it could be a good time to invest in residential REITs.

The Housing Market Is Doing Well

The best time to invest in residential REIT stocks is when the housing market is performing well. Check housing prices and apartment rents in your area. Are they increasing? Then residential REITs will generally perform well.

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