How do I Choose the Best Residential REITs?

Residential REITs are financial tools for investing in residential real estate. The Real Estate Investment Trust, or REIT, is an internationally recognized structure for a company providing investment opportunities in real estate. The REIT has to dispense the majority of its income to shareholders due to specific rules about the formation of these companies. In some ways, the REIT is like a mutual fund or other fund that investors buy into in order to get yields. In the REIT, those yields come either from the operation and acquisition of properties, or from investment in mortgages or mortgage securities.

Lots of investors look at some basic ideas in order to choose the best residential REITs. There are lots of resources for showing investors which residential REIT products “perform best” in terms of annual yield. Yield is important, but it is not the only characteristic of the most desirable REITs.

Before investing in residential REITs, you should look at the overall economic context. Look at how they are run and what kinds of properties they are based on. Observe how much of the REIT income is driven by collecting rents, how much is driven by property prices, and whether other kinds of operations contribute to residential REIT yields.

Along with yield, investors look at the kinds of fees attached to an REIT. In some kinds of investments, annual costs are referred to as an "expense ratio"; subtracting the fees out of the total yield gives investors an idea of their "net yield." Investors also often look at diversification for residential REITs. That means evaluating where different properties in the REIT portfolio are located, how they are priced, and how they appeal to renters, vacationers, or buyers.

Another aspect that investors might look at with residential REITs is access. This has to do with how the investor can buy into or sell out of an REIT. Details like these are important in order to figure out how a specific REIT fits into a single investment strategy or “architecture,” where the investor may be pursuing more than one kind of financial product.

In seeking out the best residential REIT opportunities, it’s important to rely on your own research, rather than just taking what the REIT management is saying at face value. Pros call this “due diligence,” where investors take a hard appraising look at a residential REIT or other opportunity. In general, to pick the best residential REITs, look for solid management strategy, good “economic relevance,” and how it fits into your big picture, rather than just a quick number on annual gains, which may change drastically over time.