Real estate is one of the most well-known investment categories, but buying an apartment, office building, shopping centre, or other property can require a significant amount of money. The good news is that you do not necessarily need to buy an entire property to start getting exposure to real estate.
Real Estate Investment Trusts, commonly known as REITs, let investors participate in income-producing real estate without buying and managing the property themselves.
In this blog post, you will learn what REITs are, how they work, how to invest in them, how to choose one, and what risks you should understand before putting your money into them.
What is a REIT?
A Real Estate Investment Trust is a company or investment structure that owns and typically operates income-producing real estate or real estate-related assets. These assets can include apartments, offices, shopping centres, warehouses, hotels, healthcare facilities, and in some cases real estate-related debt.
The basic idea is simple: instead of buying an entire building yourself, you invest in a REIT that owns or invests in properties. Your investment gives you exposure to the performance and income generated by those underlying real estate assets.
In Nigeria, the Securities and Exchange Commission describes a REIT scheme as a collective investment scheme that uses pooled funds from investors to acquire, hold, and manage income-generating real estate and related assets.
This makes REITs different from buying a house yourself because you are investing alongside other investors rather than becoming the direct owner and manager of a specific property. The REIT structure handles the ownership and management of the underlying assets according to its investment strategy.
How do REITs Work?
Think of a REIT as a pool of investor money that is used to gain exposure to real estate. Investors purchase units or shares in the REIT, while the REIT uses the pooled capital to own or invest in properties and related assets.
Those properties can generate income through activities such as rent, depending on the type of REIT and the assets it owns. Some of that income may then be distributed to investors, while the value of the REIT itself can also change over time.
For example, imagine a REIT owns several commercial properties occupied by businesses that pay rent. Instead of personally buying one of those buildings and dealing with tenants, maintenance, and other responsibilities, you own an interest in the REIT that owns the properties.
This means your investment performance is connected to the underlying real estate and the way the REIT is managed. It does not mean your investment is guaranteed to increase because property values, rental income, financing costs, interest rates, and market conditions can all affect performance.
Why Invest in REITs?
One major reason investors consider REITs is accessibility. Buying an entire property can require a large amount of capital, while buying shares or units in a REIT can allow an investor to gain real estate exposure without funding the entire property.
REITs can also provide diversification because real estate can represent a different asset category from investments such as individual stocks or bonds. However, owning a REIT does not automatically make a portfolio diversified because a portfolio can still be heavily concentrated in one type of property, market, or REIT.
Another potential attraction is income. Depending on the structure and performance of the REIT, investors may receive distributions generated from the underlying real estate assets.
REITs can also remove much of the day-to-day work associated with owning physical property. You generally do not have to personally find tenants, collect rent, arrange repairs, or manage the building when you invest through a REIT.
Types of REITs You Should Know
Not all REITs invest in the same kind of property. Some focus on residential properties, while others concentrate on offices, retail properties, industrial facilities, healthcare properties, warehouses, hotels, or other specialised areas of real estate.
There are also REITs that invest in real estate-related debt rather than primarily owning physical properties. The important point for a beginner is to understand exactly what a particular REIT owns and how it generates income before investing.
Another important distinction is whether a REIT is publicly traded. Publicly traded REITs are listed on an exchange and can generally be bought and sold through a broker, while non-traded REITs are not listed on an exchange and can have different liquidity, valuation, and fee considerations.
There are also private REIT structures that are not publicly traded and may have additional eligibility, liquidity, disclosure, or investment requirements. For a beginner, understanding the structure before investing is more important than simply choosing an investment because it has “REIT” in its name.
How to Invest in REITs Step by Step
Step 1: Decide Why You Want to Invest
Before buying a REIT, first decide what you want the investment to achieve. You might be looking for long-term growth, potential income, diversification, or simply exposure to real estate as part of a broader investment portfolio.
Your investment timeframe and tolerance for risk should also influence the decision. The SEC’s investor guidance recommends having a financial plan, understanding your goals and risk tolerance, and researching investments before committing your money.
Step 2: Choose the Type of REIT
Once you understand your goal, look at the type of REIT available to you. Consider whether it focuses on residential, commercial, industrial, healthcare, retail, or another area of real estate.
This matters because different property sectors can respond differently to economic conditions. A REIT heavily exposed to office buildings, for example, can face different risks from one focused on warehouses or residential properties.
Step 3: Research the REIT
Do not choose a REIT simply because it has a high dividend or distribution yield. Look at what the REIT owns, how it generates income, its financial position, its debt, its management, its fees, and the risks disclosed in its official documents.
You should also look at how concentrated the REIT is. A REIT that depends heavily on a small number of properties or tenants may have different risks from one with a broader portfolio.
Step 4: Check the Fees
Fees can have a meaningful effect on your investment returns over time. Before investing, understand the costs associated with buying, holding, selling, managing, or withdrawing from the investment.
This is particularly important when comparing publicly traded and non-traded structures. Investor.gov notes that non-traded REITs can involve significant upfront and other fees, while publicly traded REITs can involve brokerage costs.
Step 5: Use a Legitimate Investment Platform
After deciding which REIT you want, you need an appropriate broker, investment platform, or other authorised channel through which the investment can be purchased. The exact process depends on the country, REIT, exchange, and investment structure.
For Nigerian investors, the Securities and Exchange Commission provides a public database where you can check whether a capital-market operator is registered. Checking an investment platform’s regulatory status before sending it money is an important part of protecting yourself.
Step 6: Start With an Amount That Fits Your Plan
You do not need to invest all your available money simply because you have found a REIT you like. The amount you invest should fit your financial goals, emergency savings, investment timeframe, and overall portfolio.
For example, someone with ₦100,000 available for long-term investing does not necessarily need to put the entire ₦100,000 into one REIT. They could determine how much belongs in their broader investment plan and then decide whether a REIT deserves a portion of that allocation.
Step 7: Monitor the Investment
Investing in a REIT does not mean you should buy it and never look at it again. You should periodically review the investment to see whether its financial position, properties, income, management, and role in your portfolio still make sense.
At the same time, avoid checking the market price every few minutes and reacting to every short-term movement. Long-term investing generally requires looking beyond temporary price changes and focusing on whether the underlying investment still fits your plan.
How to Choose a REIT as a Beginner
One of the first things to examine is the quality and type of properties owned by the REIT. You want to understand where the income comes from rather than treating every REIT as if it represents the same type of real estate.
Next, consider the REIT’s income and financial position. Look at revenue, property income, debt, occupancy where relevant, cash flow, distributions, and other financial information available in its reports.
You should also examine management because the people responsible for operating and acquiring properties can have a significant effect on the performance of the REIT. A strong portfolio can still face problems if capital is allocated poorly or costs are not managed effectively.
Another important factor is valuation. A good underlying business can still be an unattractive investment if you pay an excessive price for it, so consider the REIT’s market value alongside its assets, income, debt, and expected future performance.
Finally, consider liquidity and fees. Publicly traded REITs generally provide easier access to market pricing and trading than non-traded REITs, while non-traded structures can involve more complicated restrictions and potentially higher costs.
REITs vs Buying Physical Real Estate
Buying physical real estate means directly owning an asset such as a house, apartment, office, warehouse, or piece of land. This can give you significant control, but it can also require substantial capital and involve responsibilities such as maintenance, insurance, taxes, tenant management, and property-related expenses.
REITs provide a different approach because you gain exposure to real estate without personally managing an entire property. This can make them more accessible and convenient, although you give up the direct control you would have as a physical property owner.
Suppose you want exposure to commercial property but do not have enough money to buy a shopping centre. A REIT could potentially give you exposure to commercial real estate through an investment that is much smaller than purchasing the entire property yourself.
The trade-off is that the REIT’s performance depends on the assets and management of the investment structure. You therefore need to evaluate the REIT itself rather than assuming that investing in “real estate” automatically means your money is protected.
Are REITs a Good Investment for Beginners?
REITs can be a useful way for beginners to gain exposure to real estate without directly purchasing and managing physical property. They may also provide potential income and diversification within a broader portfolio.
But whether a particular REIT is suitable depends on the investor and the specific investment. REITs can lose value, distributions can change, property income can decline, and publicly traded REIT prices can fluctuate with broader financial markets.
The goal should therefore not be to find a REIT that is guaranteed to make money. Instead, the goal is to understand what you are buying, why you are buying it, what could go wrong, and how it fits into your overall financial plan.
Common Mistakes to Avoid When Investing in REITs
- Choosing a REIT Only Because of Its High Dividend: A high yield can be attractive, but it does not by itself tell you whether the underlying properties, income, debt, or valuation are healthy.
- Not Understanding What the REIT Owns: Two REITs can both provide real estate exposure while having completely different property types, tenants, geographic exposure, debt levels, and risk profiles.
- Ignoring Liquidity: If you might need the money soon, an investment that cannot easily be sold could create a problem, particularly when dealing with non-traded or private structures.
- Putting Too Much Money Into One REIT: Diversification does not eliminate risk, but spreading investments across different assets and exposures can reduce the impact of problems affecting one particular investment.
Finally, be careful with REIT opportunities promoted through social media or private messages that promise unusually high or guaranteed returns. Before investing, verify the investment and the relevant operator through the appropriate regulator and review the official documentation rather than relying solely on someone else’s recommendation.
Frequently Asked Questions About REITs
Potentially, yes, because you do not have to purchase an entire property to gain exposure to real estate through a REIT. The actual minimum depends on the specific REIT, market, broker, share price, and transaction costs.
Many REITs make distributions to investors from income generated by their underlying real estate or related assets. However, the amount and frequency of distributions depend on the specific REIT and its financial performance, so investors should not assume that a particular distribution is guaranteed.
Yes, REITs carry investment risk and can lose value. Property values, rental income, interest rates, debt, economic conditions, management decisions, and broader market movements can all affect a REIT’s performance.
A REIT investment can lose substantial value, although the exact risk depends on the structure and underlying assets. This is why investors should research the REIT, understand its financial position and risks, and avoid putting money into an investment simply because it is described as real estate.
Conclusion
You do not need to buy an entire building to start investing in real estate. REITs provide a way to gain exposure to income-producing real estate through an investment structure, potentially making real estate more accessible to individual investors.
The most important thing is to understand what you are buying before you invest. Research the REIT’s properties, income, debt, management, fees, liquidity, and risks, and make sure the investment fits your overall financial plan.
If you are new to investing, REITs should be viewed as one possible part of a broader investment strategy rather than a shortcut to guaranteed returns. Once you understand how REITs work, the next useful step is learning How to Build an Investment Portfolio for Beginners, so you can see how real estate exposure can fit alongside other investments.
>>MUST-READ: Stocks vs Real Estate: Which Investment Is Better For Beginners?
