Real estate has much to offer as an investment class: cash flow, tax advantages, a source of returns that's differentiated from both stocks and bonds.
Thank goodness for real estate investment trusts (REITs).
The average investor simply doesn't have the resources to pursue some of the most common forms of real estate investment.
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Most people can't afford to buy, say, an apartment complex or office building in cash.
They also likely don't have the liquid funds necessary to invest via private equity.
Yes, they could access real estate crowdfunding systems and other apps … but only if they have enough to meet their sometimes lofty investment minimums.
Publicly traded REITs, however, allow us to invest conveniently through our brokerage accounts for the price of a single share – often just $20 or $30.
Today, we'll examine the real estate sector, which is made up of real estate investment trusts.
We'll define the sector, explain why people might want to invest in these companies and finish up by showing you how to find the best REITs to buy.
Stock (ticker) | Dividend yield | Estimated Annual FFO-per-share growth | Analysts' consensus recommendation |
Terreno Realty (TRNO) | 3.6% | 7.0% | 2.39 |
Sunstone Hotel Investors (SHO) | 4.0 | 7.6 | 2.36 |
Sabra Health Care REIT (SBRA) | 6.8 | 6.0 | 2.21 |
First Industrial Realty Trust (FR) | 3.4 | 8.5 | 2.17 |
American Homes 4 Rent (AMH) | 3.6 | 5.3 | 2.09 |
Tanger (SKT) | 3.6 | 6.3 | 2.08 |
Phillips Edison (PECO) | 3.7 | 5.3 | 2.00 |
Regency Centers (REG) | 3.9 | 5.6 | 1.86 |
EastGroup Properties (EGP) | 3.3 | 7.4 | 1.80 |
Equity LifeStyle Properties (ELS) | 3.3 | 5.0 | 1.77 |
Iron Mountain (IRM) | 3.0 | 12.9 | 1.73 |
VICI Properties (VICI) | 5.6 | 5.8 | 1.50 |
Essential Properties Realty Trust (EPRT) | 4.0 | 7.1 | 1.35 |
CareTrust REIT (CTRE) | 4.0 | 16.6 | 1.33 |
What are REITs?
Real estate investment trusts are a bit different than your typical Wall Street company.
REITs are a special class of company that was written into being decades ago when Dwight D. Eisenhower signed the Cigar Excise Tax Extension of 1960. The purpose?
To allow regular investors to invest in real estate the same way they had been able to invest in industrial stocks, retailers and utility companies.
Most REITs own and sometimes even operate physical real estate – everything from apartments, offices and industrial parks to hotels, hospitals and data center buildings – and make their money by leasing those properties out to tenants.
That said, there is a subclass of REITs, called "mortgage REITs" (mREITs), that don't own physical real estate, but instead real estate assets such as mortgage-backed securities (MBSes) and collateralized loan obligations (CLOs).
REITs stand out from other types of companies in that they enjoy an exemption from federal income tax.
In return for this favorable treatment, they must return most (at least 90%) of their taxable income back to shareholders in the form of dividends.
As you'd imagine, that results in the real estate sector offering up stocks with some of the highest dividend yields on Wall Street.
Why do investors buy REITs?
REITs provide a bounty of advantages, though arguably chief among them is their income potential.
Real estate is typically among the highest-yielding sectors, if not at the very top of the mountain:
Sector | Yield |
Real estate | 3.37% |
Energy | 3.35% |
Utilities | 3.31% |
Consumer staples | 2.46% |
Materials | 1.80% |
Health care | 1.76% |
Financials | 1.69% |
Industrials | 1.67% |
Communication services | 1.17% |
Consumer discretionary | 0.86% |
Information technology | 0.76% |
REITs also provide diversification, in more than one way.
For instance, real estate cycles tend to look different (namely, they're longer by a few years) than the average stock market cycle.
Unsurprisingly, then, their performance often doesn't mirror stocks and bonds, providing some waggle when one or both of those two assets wiggle. Says Coleman Dunleavy Wealth Management Group:
"Over the 10-year period ending in 2023, equity REITs had a 76% correlation with the S&P 500 and 56% correlation with the corporate and government bond market. Correlations are even lower over 30 years."
REITs also can come in handy when battling an inflationary environment. For better or for worse, few businesses can easily force through price hikes than real estate.
As apartment renters no doubt noticed shortly after COVID made its presence felt, landlords were willing and able to substantially hike their monthly ask.
Corporate renters often don't even have the ability to push back – in many cases, REITs will embed annual rent escalators into their contracts with tenants, which helps their income keep up with inflation.
And REITs are by far and away the easiest-to-access method of real estate investing on the planet.
No direct property ownership. No property management. No separate app for just your real estate investments. Just a few additional holdings in your brokerage account or individual retirement account (IRA).
How to find the best REITs
We can't predict exactly what you might want out of REITs, but we can help you start your search with a basic quality screen.
To get to the following list of the best REITs to buy, we've looked for firms within the sector that …
Are within the S&P 1500: The S&P 1500 is made up of the S&P 500, S&P MidCap 400 and S&P SmallCap 600.
In other words, we're not just looking for large-cap stocks – if mid- and small-cap REITs make the grade, we should consider them, too.
Have a two-year estimated AFFO growth rate of at least 5%: One way in which REITs differ from other sectors is that they're less concerned with typical earnings, and more concerned with funds from operations (FFO).
FFO is a REIT-specific metric that measures cash flow generated by a REIT's core business activities. This speaks not just to the company's success, but its ability to pay dividends.
Here, we look at estimates of "adjusted" FFO, which typically backs out one-time accounting events.
Have a dividend of at least 3%: Income is one of investors' primary demands of REITs, so it makes sense to seek out a well-above-average yield in our screen.
At a minimum of 3%, we set a baseline for yield that's more than twice what we get from the broader market.
Have at least 10 covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies.
The more research we have at our disposal, the more educated a decision we can make.
Have a consensus Buy rating: All of the REITs must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale.
S&P Global Market Intelligence converts analysts' ratings into a numerical scale.
Anything with a score of 2.5 or less is considered a Buy. Stocks with a rating of 1.5 or lower are Strong Buys.
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