Real estate investment trusts (REITs) are the well-known and obvious way to invest in real estate through stocks.
There are hundreds of REITs, and many of them are excellent long-term investments. But they aren’t the only way to invest in real estate through the stock market. Some non-REIT companies own many real estate assets and conduct other real estate activities. And there are many other companies that don’t actively own or manage real estate, but do stand to benefit from strength in the real estate market.
Let's take a look at the best ways to invest in real estate via the stock market.
Real estate investment trusts
The most obvious way to invest in real estate through stocks is by buying real estate investment trusts, or REITs.
A REIT is a company whose primary business activities revolve around owning real estate assets. REITs can make money from managing the properties they own, leasing them to third parties, developing new properties, or buying and selling properties.
To be legally classified as a REIT, a company must:
- invest at least three-fourths of its assets in real estate,
- derive at least three-fourths of its income from its real estate assets, and
- pay at least 90% of its taxable income to shareholders as dividends.
If it meets these and a few other requirements REITs aren’t taxed at the corporate level. Instead, REITs are treated as pass-through entities like LLCs and S-Corporations. Income isn’t taxed until it’s paid to shareholders.
This is a big tax benefit. With most dividend-paying stocks, profits are effectively taxed twice -- once at the corporate level, and then again at the individual level when they’re paid out as dividends.
There are hundreds of publicly traded REITs. You may have heard of some of the largest REITs on the market:
Simon Property Group (NYSE: SPG) develops, owns, and manages shopping mall properties under "The Mills" and "Premium Outlets" brand names. Prologis (NYSE: PLD) owns and operates logistics properties like warehouses and distribution centers. If you shop online, some of your packages have probably passed through Prologis buildings.
There are several good reasons to invest in REITs. For starters, they let you invest in properties that most investors can't afford otherwise. Few people can buy an office tower, for example, but you can invest in them through REITs.
Additionally, REITs enjoy the pass-through tax advantage and tend to pay above-average dividend yields. They have strong growth potential over time as the value of their property portfolios increase. And they can diversify your portfolio.
Real estate can be a defensive asset class, depending on the type of commercial property. REITs tend to hold up well during recessions and other tough economic conditions.