Can you make a lot of money from REITs?
REITs' average return
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses.
If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster. Here's a closer look at three wealth-creating REITs that could help make you a future millionaire.
TIME PERIOD | S&P 500 (TOTAL ANNUAL RETURN) | FTSE Nareit ALL EQUITY REITS (TOTAL ANNUAL RETURN) |
---|---|---|
Past 25 years | 7.6% | 11.4% |
Past 20 years | 9.7% | 10.4% |
Past 10 years | 12.0% | 9.5% |
Past 5 years | 15.7% | 10.3% |
To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return ā and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.
For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
Real estate investment trusts (REITs) can be an excellent way for investors to make a passive income. The regular rents these companies receive gives them the financial firepower to pay a steady dividend. They are also subject to unique rules that require them to pay most of their profits out to shareholders.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
Can you become a millionaire with REITs?
So, are REITs the magic shortcut to becoming a millionaire? Not quite. But they can be a powerful tool to build your wealth over time, like a slow and steady rocket taking you towards financial freedom. Remember, the key is to invest wisely, do your research, and choose REITs that match your goals and risk tolerance.
Since most non-traded REITs are illiquid, there are often restrictions to redeeming and selling shares. While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value.
Company (ticker symbol) | Sector | Dividend yield |
---|---|---|
KKR Real Estate Finance Trust (KREF) | Mortgage | 14.0% |
Two Harbors Investment (TWO) | Mortgage | 14.0% |
Ares Commercial Real Estate (ACRE) | Mortgage | 13.8% |
Brandywine Realty Trust (BDN) | Office | 13.6% |
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
āI recommend REITs within a managed portfolio,ā Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means that to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
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According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
How do you make passive income with REITs?
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
Historically, REITs tend to deliver their highest returns during early stages of the real estate recovery cycle, according to research from Nareit, an association representing the REIT industry. That could spell a strong performance for REITs moving forward.
Because you're smart, you may be asking yourself, What happens if the short-term interest rate goes up? Any increase in the short-term interest rate eats into the profitāso if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money.
REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.
REITs historically perform well during and after recessions | Pensions & Investments.