You can find real estate investment trusts, or REITs, that specialize in just about every kind of commercial property you can think of. One type that has some particularly interesting opportunities right now is the industrial REIT. For example, many of the massive distribution centers used in the rapidly-growing e-commerce fulfillment space are owned by industrial REITs.
Having said that, there’s a lot you should know before you buy your first industrial REIT. Here’s an overview of what exactly an industrial REIT is, the risks you should know before investing, and some examples to get you started.
What is an industrial REIT?
A real estate investment trust, or REIT, is a special type of company that primarily invests in commercial properties or other real estate assets.
To officially qualify as a REIT, however, a real estate company needs to meet certain requirements. These include, but aren’t limited to, a few factors:
- A REIT must invest at least 75% of its assets in real estate.
- A REIT must derive at least 75% of its income from real estate.
- A REIT must have at least 100 shareholders.
- No five investors can own more than 50% of the shares of a REIT.
- A REIT must pay out at least 90% of its taxable income as dividends to shareholders.
If a REIT meets all of the requirements, it gets a big tax advantage. Specifically, REIT profits are not taxable on the corporate level. Even if a REIT earns billions of dollars in profits, the IRS can’t charge a penny in corporate tax. This is a huge benefit for REIT investors. With most dividend stocks, profits are effectively taxed twice -- once on the corporate level when they’re earned, and again on the individual level when dividends are paid out.
Most REITs specialize in a certain type of commercial property. Industrial REITs, as the name implies, own and manage industrial facilities, including warehouses, distribution centers, manufacturing facilities, and more. Some specialize in a single type of industrial property, while others own a variety. These properties are then leased to tenants -- either an entire building or just a portion.
Risks of investing in industrial REITs
No stock capable of market-beating returns is without risk, and industrial REITs are certainly no exception. While I consider industrial properties to be relatively low-risk when compared with several other types of commercial real estate, there are still some key risk factors investors should be aware of.
Interest rate risk -- No discussion of REIT investing would be complete without mentioning interest rates, which can have a huge amount of influence over REIT stock price movements. While I could write several pages on the dynamics of interest rates and REIT prices, the general idea to know is that rising interest rates are bad news -- as you can see in the chart below, long-term yields on risk-free instruments (the 10-year Treasury note is a good indicator) and REIT prices typically move in opposite directions.