5 Benefits of Investing in REITs

Real estate has always been a popular investment, but in the past, not everyone could get in on the action. Buying an investment property is a serious commitment. You need quite a bit of money, time, and know-how to succeed.

Fortunately, in 1960, Congress created real estate investment trusts (REITs). These are companies that either own or operate income-producing properties, and they allow anyone to invest in real estate. If you're interested in adding real estate to your portfolio, here's what REITs have to offer.

1. They're easy to buy and sell

REITs are traded like stocks. They're bought and sold in shares, and you can invest in them online through a brokerage account.

This makes REITs a convenient and affordable way to invest in real estate. You don't need to save thousands of dollars, like you would if you were buying a property. You can buy however many shares your budget allows. Many online stock brokers also offer fractional shares, so you don't even need enough money to buy a full share.

2. They deliver high returns

REITs have historically been an excellent investment. In fact, they've even outperformed the stock market over the last 50 years.

An analysis of REITs vs. stocks by The Motley Fool compared their average annual returns. It used the S&P 500, an index with 500 of the largest companies, to represent the stock market. It used the FTSE Nareit All Equity REITs Index, an index that contains all 13 REIT subsectors, to represent REITs.

From 1972 to 2023, the REIT index posted an average annual return of 12.7% compared to 10.2% for the S&P 500. REITs also performed better over the past 20 and 25 years. Stocks have the better average performance for the last decade, but over a longer period of time, it has been REITs with a solid lead.

3. They pay generous dividends

Some companies pay dividends, a portion of their profits that they distribute to shareholders. By law, REITs must pay at least 90% of their taxable income to shareholders as dividends.

If you're looking for investments that will generate passive income, there are plenty of high-dividend REITs available. REITs pay an average dividend yield of about 4.3%. On a $10,000 investment, that'd be about $430 in dividends per year. And that's just the average -- some REITs pay much more.

Keep in mind that dividends are taxed as ordinary income. If you invest heavily in REITs, you'll likely increase your tax burden. But there is a way to avoid this explained below.

4. You can invest in REITs through an IRA or Roth IRA

Since REITs are traded like stocks, you can invest in them through brokerage accounts. That includes standard brokerage accounts and individual retirement accounts (IRAs). If you invest in REITs through a traditional IRA, you can deduct those contributions from your income taxes.

You may be even better off investing in REITs through a Roth IRA, though. While you can't deduct Roth IRA contributions from your income, this type of account offers tax-free growth and withdrawals. That means you won't be taxed on REIT dividends if you invest in them through a Roth IRA.

Want to open a Roth IRA? Check out The Ascent's list of the best Roth IRA options.

5. They're less volatile than stocks

The stock market goes through lots of ups and downs. It has historically gone up by about 10% per year, but that's an average based on decades of data. There are years where it does much better, but also years where it loses money.

REITs are less volatile. In investing, beta is the measurement used for volatility. The S&P 500 has a beta of 1.0, and anything lower than that is less volatile. The REIT sector has a beta of 0.75, according to The Motley Fool's analysis, and several popular REITs have betas even lower than that. If you're looking for more stability than stocks provide, REITs fit the bill.

With all their benefits, REITs could be a smart and safe addition to your portfolio. They're good for diversification if you've only been investing in stocks so far -- they perform well, and the dividends are some of the highest you can find.