How Many REITs Should You Own in Your Portfolio?

Real Estate Investment Trusts (REITs) offer a way to invest in real estate without direct property ownership. These companies own, operate, or finance income-producing real estate across various property sectors. Many investors consider adding REITs to their portfolios, often asking about the optimal number to hold. The answer is not universal, as it depends significantly on individual financial circumstances and investment objectives.

Understanding Your Investment Profile

Before determining the number of REITs to include in a portfolio, investors should assess their personal financial landscape. Investment goals are a primary consideration, differentiating between objectives such as saving for a short-term down payment or building long-term wealth for retirement. The time horizon for an investment also plays a significant role, as longer timeframes generally allow for greater recovery from market fluctuations.

An investor’s risk tolerance is another important factor, reflecting their comfort level with potential losses in exchange for higher returns. Those with a higher tolerance might consider a greater allocation to investments with more volatility, while conservative investors may opt for a more stable approach. Evaluating one’s financial situation, including assets, liabilities, income stability, and an adequate emergency fund, provides a foundational context for investment decisions. This personal financial assessment dictates the broader asset allocation strategy, which subsequently informs specific decisions about real estate investments like REITs.

Diversifying Within REITs

REITs encompass a wide variety of real estate sectors, each with distinct characteristics and sensitivities to economic conditions. Equity REITs, which own and manage properties, are the most common type and include sectors such as residential, retail, office, industrial, healthcare, data centers, self-storage, timber, and infrastructure. Mortgage REITs (mREITs) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities, while Hybrid REITs combine strategies of both Equity and Mortgage REITs.

Spreading investments across different REIT sectors is crucial for mitigating risk and achieving balanced real estate exposure. Various sectors perform differently depending on economic cycles, interest rate changes, and consumer trends. For instance, industrial REITs might thrive during periods of e-commerce growth, while retail REITs could face challenges.

Concentrating an investment solely in one type of REIT, like retail REITs, exposes a portfolio to concentrated risks. Diversifying across several distinct types, such as a mix of residential, industrial, and healthcare REITs, helps balance potential risks and rewards. This strategy means that “how many” REITs refers less to a simple numerical count and more to the number of distinct real estate sectors represented in a portfolio.

Choosing Your Investment Approach

The method an investor chooses to gain REIT exposure impacts how they perceive the “number” of REITs they own. One approach involves purchasing individual REIT stocks, which represents direct ownership of shares in specific real estate companies. This method offers the potential for focused gains if a chosen company performs well, but it also requires substantial research and active management to select and monitor each holding. To achieve diversification across property types and geographic regions, this approach requires acquiring multiple individual REITs.

Alternatively, investors can choose to invest through pooled vehicles such as REIT Exchange Traded Funds (ETFs) or mutual funds. These funds typically hold a diversified portfolio of many underlying REITs, often spanning various sectors and companies. Investing in a single REIT ETF or mutual fund provides immediate exposure to dozens or hundreds of individual REITs, making “how many” less about counting individual stocks and more about the number of funds held. These funds are managed by professionals and generally require a lower minimum investment to achieve broad diversification. When considering costs, individual stock purchases incur trading fees, while funds typically have expense ratios, which are annual fees charged as a percentage of assets managed.

Allocating REITs in Your Overall Portfolio

Integrating REITs into a comprehensive investment portfolio involves applying the principle of asset allocation, where REITs are considered one asset class alongside others like stocks, bonds, and cash. REITs can offer portfolio diversification due to their historical tendency to perform differently than traditional stocks and bonds, and they often provide a source of income through dividends. By law, REITs are generally required to distribute at least 90% of their taxable income to shareholders annually, which results in consistent dividend payments. These dividends are typically taxed as ordinary income for investors.

General guidelines for REIT allocation in a diversified portfolio often suggest a range of 5% to 15% of total assets, with some investors potentially allocating up to 20% depending on their specific income goals or desire for greater real estate exposure. These percentages are flexible and should be adjusted based on an investor’s risk tolerance, time horizon, and overall financial objectives, as previously assessed. The “how many” question is best addressed by determining the desired percentage allocation to real estate within the overall portfolio, and then deciding whether to achieve this through a few diversified REIT funds or a selection of individual REITs. Periodically reviewing and rebalancing the portfolio is important to maintain the chosen REIT allocation and ensure it aligns with evolving financial goals.