How to Find the Best REIT Stocks

What are REIT stocks?

REIT portfolios typically include income-producing real property like apartment complexes, shopping malls and office buildings.

Publicly traded REITs must pay out at least 90% of the taxable income they earn from these properties to investors, which can translate to high yields for REIT stockholders. Qualified investors also have the option of exploring privately owned REITs, also known as non-traded REITs.

"REITs can be publicly traded on one of the exchanges or privately owned that accept investments from private investors or individuals," says Daniel J. Laginess, a certified public accountant and investment adviser representative and managing partner at Creative Financial Solutions in Southfield, Michigan.

"Privately owned REITs do not have that dividend requirement and they may only allow redemptions during a designated redemption period," Laginess says. "They may also suspend redemptions, normally due to adverse market conditions, which happened frequently during the financial crisis in 2008."

REITs boast a long-term track record of providing inflation relief too: REIT dividends grew faster than inflation in all but three years between 2000 and 2020, according to data from Nareit.

Should you invest in REIT stocks?

When inflation is on the rise, the best REIT stocks can be an appealing place to invest thanks to their high yields. 

But rising interest rates can also be a detriment to returns. "Rising interest rates can adversely affect many REITs due to the increased costs of purchasing and maintaining properties as well as the possibility of decreasing property values," Laginess says. 

Following an initial surge in REIT stock share prices, the Federal Reserve's effort to tame inflation in the post-pandemic period with interest rate increases negatively impacted many REITs due to rising borrowing costs.

Falling rates can have the opposite effect, boosting demand and pushing up values in property markets. REIT stock share prices enjoyed a mid-summer bounce when it became clear the Fed would begin cutting interest rates.

Sensitivity to interest rates means REIT stocks will behave like other stocks. If you're trying to diversify your portfolio, Edward Fernandez, president and CEO of 1031 Crowdfunding, a real estate investing platform, warns that publicly traded REIT stocks may not fit that bill.

"A (publicly) traded REIT belongs more in your equity portion of your allocation and is not investing in true real estate," he says. "REIT stocks are subject to the volatility of the equity market because the value of that stock is not directly tied to its real estate; it's tied to the company that owns the real estate and its performance."

That's about "correlation," or the degree in which two assets move in tandem, is measured on a scale of -1 to 1 where 1 indicates perfect correlation.

According to Wells Fargo Advisors, over the 10-year period ending in 2023, equity REITs had a 0.76 correlation with the S&P 500 and 0.56 correlation with the corporate and government bond market. Correlations are even lower over 30 years.

If you want to diversify with REIT stocks, Fernandez says to look to non-traded REITs. These can usually be purchased through a financial advisor. Non-traded REITs can be riskier than their publicly-traded counterparts, however, with lower liquidity and transparency plus higher up-front fees – usually 9% to 10%.

How to find the best REIT stocks

REITs are often categorized by the type of real estate they invest in, such as office, commercial and industrial space as well as retail and residential property, among many others.

"It is very important to consider the investment objective of a REIT before investing," Laginess says. "During the COVID-19 pandemic, many employers had employees working from home and have now extended that policy leaving many office buildings unused or significantly oversized."

He says when seeking out the best stocks to buy in the real estate sector, consider REITs that invest in data centers, healthcare or self-storage properties instead, "as those industries appear to have been less affected by recent trends and financial conditions and have actually shown some growth." 

The best REIT stocks

There is no one-size-fits-all REIT that will work in every portfolio. However, these three real estate investment trusts are among the more promising publicly traded REIT stocks to consider right now.

Welltower (WELL) has been investing in healthcare infrastructure since 1970, with portfolio holdings such as senior housing operators, post-acute care providers and health systems. Welltower was named one of the World's Most Admired Companies by Fortune Magazine in 2019.

The healthcare REIT reported funds from operations – or FFO, a key REIT earnings metric – of $1.11 per share in the third quarter of 2024, up 20.7% year over year. Welltower paid a dividend of 67 cents per share, a payout ratio of 60%. That's down from 66% a year ago, and it suggests accelerated upside for the dividend.

And Welltower management increased its guidance range for full-year FFO to $4.27 to $4.33 per share from $4.13 to $4.21 per share. At current levels WELL is yielding 2.1%.

Digital Realty Trust (DLR) invests in data centers, colocation (centers where businesses rent space for data servers and other computer hardware) and interconnection solutions properties.

As of September 30, 2024, DLR reported more than 300 data centers across more than 50 metros, with signed total bookings during the third quarter that management expects will generate $521 million of annualized rental revenue.

FFO per share was flat year over year at $1.55, though management raised its guidance for full-year core FFO per share to a range of $6.65 to $6.75. DLR pays a quarterly dividend and currently yields 2.6%.

Public Storage (PSA) is one of the largest self-storage facilities operators in the U.S. with more than 3,000 facilities across the nation. In addition to self-storage, it invests in business, car and RV, boat and climate-controlled storage.

Though PSA reported an $11.7 million increase in self-storage net operating income for the third quarter, NOI per share was down 32.5% to $2.16 due to the impact of foreign exchange movements on the company's euro-denominated debt and other financial factors. 

PSA's portfolio has expanded by 35% since it started operating in 2019. The self-storage REIT currently yields 3.8%.

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