How Do REITs Grow? (Everything You Need To Know)

Even though REITs have been around for north of 60 years, this asset class – historically one of the strongest asset classes there are – is almost criminally overlooked. New investors, though, are diving headfirst into the world of Real Estate Investment Trusts more than ever before.

All of this “new blood” has a lot of folks wondering how do REITs grow and how do they produce a return for their investors. There are a couple of different answers here – income can be generated from rental payments, equity growth, appreciation, and a whole host of other sources – and really getting to the bottom of this is a big part of becoming a successful REIT investor.

In the rest of this detailed guide we cover most everything you need to know about how REITs work, how they grow, how REIT investors actually make money, why this asset class is so popular right now, and more.

Let’s get into it!

REITs 101

Real Estate Investment Trusts have a bit of a unique back story.

Created in the 1960s (by then Pres. Eisenhower), REITs were established as part of the Cigar Excise Tax Extension of 1960.

Kind of wild that a super popular investment class today would have been established as part of cigar excise taxes 60+ years ago, right?

Back then, though, the idea was to offer everyday investors an opportunity to jump on board real estate investing even if they didn’t have the kind of cash that traditional real estate investors brought to the table.

Real estate has always been the top dog in the investment world. It’s the gold standard of all asset classes – before long time it’s been sort of locked away from regular Joes and Janes that don’t have a foolishly heavy war chest of capital to work with.

REITs, though, really leveled the playing field in a big way.

Now everyone can get into the real estate investment game with a whole host of other benefits that individual investors wouldn’t have enjoyed otherwise – including the opportunity to “own” a diversified portfolio of properties around the country (and even the world).

Not too shabby, right?

Reits are a longer-term investment asset, though, we are not suggesting that there are no drawbacks or shortcomings to investing with this type of approach.

For one, the dividends that REITs pay can be taxable. Another issue is a difficulty liquidating assets without paying huge penalty fines.

But we get into that a little more later down the line.

How Do REITs Work?

The way REITs work is pretty simple and straightforward:

Investors basically pool all their cash and capital together, buying “shares” in an organization that owns property on behalf of those shareholders.

At least 75% of the total assets held by REITs need to be in the real estate world, and 90% of ALL income generated from these real estate investments need to be distributed back to individual shareholders.

You can see how getting into the right REIT has the potential to totally transform your financial future, usually a whole lot faster than you ever would have thought possible.

Of course, there are some risks and downsides to jumping on board the REIT train.

For one thing, the dividends paid out by REITs are taxable. It’s never fun to have to cut a check to the taxman – especially one as big as what you’ll have to send when you’re making serious money from REIT dividends.

Secondly, though REITs are insulated somewhat from traditional market swings by their very nature they are still hypersensitive to interest rates.

If you start to see the treasury yield rise you can be sure that REIT values are going to fall inversely.

Lastly, as we highlighted a moment ago, REITs are very much a long-haul sort of investment.

If you try to liquidate your REIT shares earlier than your REIT agreement allows, you’ll end up paying some pretty stiff prepay with penalties that might wash all the profits you would have otherwise earned.

How Do REITs Grow?

There are a couple of different ways that REITs can grow, including (but not limited to):

Purchasing new properties and income generating real estate assets with new funding from new REIT shareholders
Enjoying asset appreciation from a friendly real estate market that drives valuations higher
Generating new income or increasing rents/payments from properties already in the REIT portfolio
Selling properties and building a bigger war chest to accumulate even more properties later down the line

… And that’s just the tip of the iceberg!

REITs might not have the same kind of crazy growth pattern that certain stocks might have, but they don’t have the same kind of “shock and all” peak and valley day-to-day value fluctuations, either.

We’ve already touched on this a couple of times, but REITs are very much a long-haul sort of investment.

They grow over time, generate bigger dividends over time, and can really help fast-track your wealth accumulation plans.

Why are REITs So Popular?

REITs are enjoying a big boost in popularity for a couple of different reasons.

For one thing, the upfront costs for getting into investment real estate projects is higher today than maybe any other time in human history. That’s keeping a lot of people out of real estate that would otherwise love to jump in – and REITs kicked the door wide open for them.

Secondly, REITs make accessing the real estate investment world almost effortless.

The structure is simple and straightforward. The purchase process is almost effortless. And earning a decent return (not to mention some decent dividend payments, too) makes REIT investing really tempting.

Closing Thoughts

At the end of the day, REITs will see their growth climb as the real estate market climbs.

The same kinds of things that positively impact the value of a piece of real estate – a better market, a great location, improved rent prospects, more equity, etc. – are all going to have a beneficial impact on RIT’s that own those kinds of properties.

Historically, REITs do very (VERY) well in the markets over the long haul.

They are well worth taking a closer look at.

As stated below, all of our investing articles are for entertainment purposes only! This is not investment advice.

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How Do REITs Grow? (Everything You Need To Know)