One kind of security you can trade in that’s like a stock, but with a lot more benefits is a real estate investment trust (REIT). It’s basically a share of a firm that owns and manages multiple properties, and it allows you to get a cut of the profits generated from income made off those properties. REITs can be quite a gold mine for investors if they’re bought at the right time, but they do have a few risks to beware of too. Here’s some basics in a guide to REIT investing.
REIT Pros: Investing In Real Estate Without Deep Pockets
Real estate is considered an alternative asset with tangible value, and as such, some investors like to hold it in their portfolio instead of only holding stocks and bonds. The problem is buying real estate outright takes a lot of capital, and most investors would have to secure that capital through mortgages or hard money loans. Then there’s the challenge of turning the property into a source of income either through renting it out, or fixing and flipping it. Either way takes hard work and a lot of time that an investor may not be willing to put into it. With a REIT, you’re essentially investing in real estate through a company that’s in charge of construction, rent collection and all the important aspects of real estate, and you can just sit back and let them do the work. According to the experts at Money Morning, “You also want a company that’s transparent about its goals and strategies and keeps investors up-to-date along the way. A management team that doesn’t hold itself accountable to investors may not be working in your best interests.”
REIT Pros: Great Dividend Payments
REITs are required by law to pay investors dividends. In fact, the amount they must pay is at least 90% of their income. That means if a REIT is raking in a lot of revenue, you’ll be receiving some great dividend payments from them at potentially much higher amounts than most regular stocks. That’s a lot to like.
REIT Pros: Tax Benefits
Since REITs pay out the amount they do in dividends, they are given certain tax breaks. One of those is the corporate tax which they are exempt from, and it allows them to keep more capital on hand to grow their assets. Also, they have been given somewhat of a dividend tax break to investors with a 20% pass-through deduction with the Tax Cuts and Jobs Act that President Trump signed into law. That’s because they are considered pass-through income.
REIT Cons: Fluctuation With The Real Estate Market And Economy
REITs are heavily dependent on a strong real estate market and a thriving economy. When the economy is doing great, REITs are a fantastic buy. But if the economy goes through a recession, REIT profits can take a heavy hit and income start to dry up. Such was the case in 2008. You also have to pay attention to interest rates that the Fed may raise, and those in the bond market. Rising interest rates can affect REITs in their bottom line.
REIT Cons: Taxes On Dividends
In most cases, the dividends you get paid through REITs are taxed at a higher rate than other qualified dividends. This is in part because investors are paid more in REIT dividends than in other investments. If you’re looking to avoid paying taxes on dividends, you may need to keep REIT investments in a Roth IRA account.
In conclusion, REITs are a very good investment for gaining exposure to commercial real estate, and their dividends may be a great source of income, or even a way you could have more funds reinvested in the stock market. But like all other securities, you need to weigh their risks and do your research on which REITs are managed the best.