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REITs 101: Investing in Commercial Real Estate Through Stocks

Real estate investment trusts, or REITs, give everyday investors the ability to invest in commercial real estate assets through the stock market. In this Fool Live video clip, recorded on Sept. 3, Millionacres senior real estate specialist Matt Frankel, CFP, discusses the basics of REITs and why investors should become familiar with them.

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Matt Frankel: So, when it comes to investing in real estate, the main way to do it through the stock market, if you want to invest directly in real estate, is through real estate investment trusts, usually abbreviated REITs, then you pronounce that REITs. Make sure we get the terminology down first. There are two main types of REITs to invest in. You notice there are three bullets on the sheet, but there are only two different main types. There are equity REITs, which are usually what I’m referring to when I say the word. These are companies that own properties.

The other type of REITs are called mortgage REITs. They own mortgages, mortgage-backed securities, mortgage servicing rights, which are abbreviated MSRs. If you make monthly mortgage payments to a third-party company, not a bank, odds are you’re paying a mortgage REITs. These are such a different type of investment. You’re not really buying real estate, you’re buying mortgages, which are real estate assets. But they’re not really properties. They’re actually not even included in the real estate sector. These are technically part of the financial sector. Then there are a few what they call hybrid REITs that own both. There are very few and none that we’re really that big fans of. Generally, we’re going to be talking about equity REITs throughout this discussion. 

There’s no requirement that a REIT has to buy or invest in just one type of property. Having said that, most of them do. Most REITs specialize in a single type of commercial property. Think office buildings. It’s really rare for a REIT to have two unrelated types of properties making up its portfolio. For example, it will be really rare to see a REIT that owns warehouses and hospitals. A big competitive advantage in the real estate industry is your knowledge of a specific property type. So a lot of REITs try to use that for their advantage. If you are a healthcare REIT, you might even have some doctors on your board of directors. You’ll have some industry experts on your leadership team. You have people with years of experience dealing with, negotiating with physicians and hospital properties and senior housing properties. You generally try to stay within your wheelhouse, if you’re a real estate owner. That’s not always the case, but the vast majority of REIT specialize in one single type of property. We’re going to go through all of the official real estate subsectors and a few of our favorite examples from each one.

These aren’t official recommendations, just some of the the biggest and most well-run companies in each of these subsectors you can put on your radar, if you’re interested in investing in them. Before we go on, one of the best things about REITs is they let everyday investors like you and me invest in commercial properties without having to actually own a commercial property. This historically has been the realm of an elite few investors. Not many people listening could go out and buy a high-rise office building in the city. But through REITs, you’re able to do that. That’s why REITs were created. They’ve been around since the 1960s. They really gained in popularity in the 1990s, what I will call the golden age for REIT growth. But there are a lot of REITs, a little over 200 in our investible universe.