Retirees are often advised to maintain diversified portfolios while focusing on assets that can produce steady income. REITs can help in both regards.
REITs, or real estate investment trusts, are companies that operate portfolios of properties, whether it’s data centers, malls, fulfillment centers, healthcare facilities, or residential complexes. They make it possible for retirees to branch out into real estate without actually having to own or maintain physical property as investments.
As of early 2024, 50% of U.S. households owned REITs, according to the National Association of Real Estate Investment Trusts. And for retirees, REITs offer a couple of distinct benefits.
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REITs tend to pay above-average dividends since they’re required to distribute at least 90% of their taxable income to shareholders on an annual basis. REITs also have inherent inflation protection. They often can raise rents and pass that income along to shareholders. And those higher dividends can help retirees stay ahead of rising costs.
But are REITs a retirement investment worth pursuing? Or is there too much risk involved?
There’s upside, but it comes at a cost
While REITs can serve as a source of steady income for retirees, they’re not without risk, says
Mike McCracken, president and founder of Wealth Guide Financial.
“REITs could be part of a diversified retirement portfolio, but I don’t think they’re as safe as many people assume,” McCracken says.
“Clients have told me that they like the idea of holding real estate without the headache of tenants or repairs, and their thoughts are that REITs can satisfy that desire. That may have been the case prior to 2021, but rising interest rates have caused REITs to underperform low-cost stock portfolios over the last few years,” McCracken continues.
Adam Vega, CFP and Managing Partner at Avance Private Wealth Management, warns that REITs aren’t necessarily as liquid as you might think.
“Publicly traded REITs are those that trade on an exchange, like any normal stock would. You can buy it today and, through the public markets, sell it tomorrow. Private REITs do not trade on an exchange. There is no open market available, so if you bought it today, you are at the mercy of the issuer of when you might be able to sell it,” he explains.
In fact, Vega cautions, “With a private REIT, it could take years to find the right buyer. This isn’t inherently bad, but this should be understood, as the lack of liquidity is often what helps keep the price more stable on private REITs.”
(Image credit: Getty Images)
Another thing to consider is that REITs are very sensitive to interest rates.
“Rates from 1985 to 2021 generally were slowly falling, providing decent safety with investing in REITs,” McCracken explains. “When rates go up, [REIT] share prices usually drop because their high dividend yields become less attractive compared to bonds.”
REITs also aren’t immune to sector-specific meltdowns. As McCracken points out, office REITs struggled with occupancy issues during and after the pandemic, when remote work was all the rage and companies were reluctant to renew leases and bring workers back to the office.
Other sectors could be similarly vulnerable in the future. If regulations come down the pike that crack down on data centers, REITs that operate those facilities could see their value decrease.
Have REITs become trendier?
Despite the risks, McCracken says he’s seen a growing number of retirees put money into REITs.
“There has been some increased interest in REITs over the last 10 to 15 years, mostly because they are easy to buy and sell compared to owning actual real estate,” he says. But that doesn’t mean those people chose wisely.
As McCracken explains, many of his clients who hold REITs have been disappointed with the returns those assets produced over the past five years in particular.
“Many of them would have been better off in a simple, low-cost stock index fund,” he says.
Vega, meanwhile, says he’s seeing more interest in REITs despite the fact that they had a “tough 2025.”
“Higher rates slowed down the sector, and as an underperforming asset, it puts it back on the radar as an opportunity to consider. For those seeking income and diversification, it is starting to look attractive again,” he says.
Should REITs be a part of your retirement investment strategy?
Whether REITs are a good choice for you depends on your income needs, goals, and appetite for risk. But McCracken certainly wouldn’t say they’re right for everyone.
“Currently, I tell my clients that REITs have had their day and are generally underperforming the broad stock market indexes in recent years,” he says. “For most retirees, I think there are simpler and more effective ways to get growth and income without adding the extra complexity or the interest rate risk that comes with investing in REITs.”
Vega says many retirees like the consistency of payments REITs can provide.
They can also help with diversification. The key, he says, is to limit exposure.
“REITs should be considered part of your real estate allocation,” he says. “Sticking to normal diversification rules, a good guideline is no more than 15% of a portfolio in any one sector.”
