When shopping for a REIT it’s important to know the composition and quality of its holdings. Equity REITs acquire commercial property -- apartment buildings, shopping centers, warehouses, even timberland -- and generate their income from tenant rent. You’re looking for outfits that operate top-notch space with quality, long-term tenants. If the REIT owns a strip center with a vape shop, a place that will sell your stuff on eBay, and the Pretty Kitty Pet Emporium, skip it.
Mortgage REITs earn their living by trafficking in real estate mortgages and mortgage-backed securities. REITs typically focus on a specific category such as residential (apartment buildings, hotels, manufactured housing), retail (malls and shopping centers), or healthcare (hospitals, assisted living centers, medical offices). Investors need to consider the current state and future outlook for a REIT’s chosen sector when evaluating the trust. Many residential-focused REIT’s limit their investments to specific markets, usually large cities, thus the prospects for those local economies should be factored into an investment decision.
The caliber and experience of a REIT’s management team is also critical. Real estate is a savage business. Success requires careful selection of asset properties, effective tenant recruitment, and highly efficient execution of every management function from marketing to maintenance. It’s a jungle out there, so stick with established trusts that have a track record of maintaining a decent payout across multiple market gyrations.
Keep an eye on the REIT’s debt, too. Trusts that use a significant amount of borrowed capital will be more vulnerable when interest rates rise. Mortgage REITs tend to be more leveraged than Equity trusts.
My position: Don't want to own any commercial buildings or mortgages. That leave... no REIT