Healthcare REITs: A Guide for Investors - SmartAsset

Whether we’re talking about acute medical care or long-term assistance, healthcare is one industry that has a tendency to remain in-demand through all market cycles. Healthcare REITs are one way for investors to diversify their portfolios while also capitalizing on this necessary sector. Here’s a look at what healthcare REITs are and how this investment could impact your own portfolio. A financial advisor can help you build an investment portfolio that includes REITs and other securities.

What Are Healthcare REITs?

In short, a real estate investment trust (REIT) is an entity that includes a certain type of real estate within it. Just like stocks and mutual funds, investors can purchase shares of REITs through a brokerage, financial advisor or robo-advisor. When an REIT earns a profit from its real estate, investors share in the growth through dividends and higher-value shares.

Healthcare REITs are a specific subset of these investments. A healthcare REIT is a company that invests exclusively in real estate assets related to the healthcare and medical fields. These include:

Hospitals
Medical office buildings
Clinics
Senior and assisted living facilities
Nursing homes and skilled nursing facilities
Health and wellness centers

As with all REITs, healthcare REITs can be publicly traded, public non-listed or privately-traded. Publicly listed REITs are available for purchase through public stock exchanges and brokerages, where shares can be purchased or sold relatively easily.

Benefits of Healthcare REITs

There are a number of reasons why healthcare REITs are appealing. Baby boomers are aging and requiring more medical attention, and the pandemic has increased the need for medical care. The growth of Big Pharma has hiked the need for laboratory space as well.

If you’re looking to add healthcare REITs to your portfolio, here are some benefits of them:

Income: They can provide passive income streams. The IRS requires REITs to pay out at least 90% of their annual taxable income to investors as dividends. For this reason, REITs can be a good source of passive income. You can reinvest these funds, or they can cover part of your expenses in retirement.

Passive: These securities don’t require hands-on management. Unlike buying your own real estate, such as a rental property, REITs don’t require regular management from investors. The company itself takes care of buying and developing the property, finding and managing tenants, collecting rent and more.

Varied Revenue: These properties often have “triple net” leases. In addition to paying rent, tenants with triple net leases are also responsible for things like property taxes, repairs, some maintenance and even building insurance. This is often the case with properties held by healthcare REITs and limits expenses incurred by the company.

Stable Revenue: The properties held and managed by healthcare REITs generally include hospitals, clinics and other types of medical facilities. These types of companies tend to sign long-term leases and remain in place for many years, giving healthcare REITs a stable source of income and a limited risk of tenant vacancy.

Diversity: By adding REITs to a portfolio, investors are able to further diversify their investments. This can help hedge against market downturns and inflation.

Stability: While markets are often cyclical in nature, the need for acute and long-term healthcare services is relatively steady. Even when the economy trends downward, most consumers are willing to avoid luxuries — such as travel or retail spending — but won’t often do the same for healthcare.

Risks of Healthcare REITs

It’s important to also note that healthcare REITs have certain risks. Be sure to account for these according to your needs before making any final investments. Here are some things to keep an eye out for when investing in healthcare REITs:

Interest Rate Sensitivity: REITs and 10-year Treasury notes tend to have an inverse relationship. So as Treasury yield rates increase, REIT performance often decreases.

Market Oversupply: When it comes to healthcare-centered REITs, demand will likely remain strong for many years to come. However, if there’s saturation in a particular market- from developers building too many properties or a sudden influx in vacancies – tenancy and profit can both see an impact. An oversaturated market has a higher potential for costly extended vacancies or reduced rental rates.

Limited Uses: The properties that are designed for healthcare use are often specifically tailored to that purpose. Because of this, it may be more challenging to fill a property vacancy due to a limited tenant pool.

Bottom Line

Healthcare REITs are companies that invest in medical- and healthcare-focused properties. Investors who own shares of these companies can diversify their portfolios, hedge against market downturns as well as potentially see growth through increased share values and dividends. Though there are a few risks to keep in mind, these types of investments tend to remain in steady demand.

Tips for Investing in Healthcare REITs

Healthcare REITs can be a good investment, but building a portfolio will require more. A financial advisor can help you flesh out your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Want to take a look at what your portfolio will look like in a decade? The SmartAsset investment calculator can help you do just that. Enter how much you have invested, how much you’re contributing and what rate of return you expect. We’ll then show you your investment growth five, 10 or even 30 years into the future.