Is investing in REITs a Good Option?

To invest in land and buildings to receive income and capital appreciation, investors can purchase shares of real estate investment trusts (REITs).

To invest in land and buildings to receive income and capital appreciation, investors can purchase shares of real estate investment trusts (REITs).

 

REITs distribute 90% of their earnings from rent, interest, and capital gains as dividends to their shareholders. Real estate investment trusts (REITs) are popular because of their consistent dividend payouts,

 

but they are also vulnerable to the ups and downs of the real estate market and interest rate fluctuations.

 

 

You should consult a financial professional to determine whether or not a REIT is appropriate for your needs and risk tolerance, and if so, which type of REIT would be most beneficial.

 

To give investors access to the real estate market, the U.S. Congress authorized REITs in the 1960s.

 

REITs are exempt from paying the double federal income tax imposed on corporations so long as they agree to pay out 90% of taxable income as dividends and comply with other requirements. Instead, shareholders just have to pay taxes on their dividend income at their normal rates.

Benefits of REITs

One of the most attractive features of the real estate investment trust market is the diversification it provides.

Owning real estate can be a good hedge against market volatility because of the asset’s low connection to other financial instruments like equities and bonds.

While many investors would like to reap the benefits of real estate investment, many are hesitant to take on the responsibilities of property ownership and management.

Because REITs handle rent collection, upkeep, and repair for their investors, they are free to pursue other business opportunities.

 

Moreover, the substantial dividends paid by REITs are a major reason for their popularity. Real estate investment trusts (REITs) offer investors some of the market’s highest dividend yields. For instance, the average dividend paid by S&P 500 companies was 1.34% in May 2021, while the average dividend paid by REITs was 3.16%, as reported by the National Association of Real Estate Investment Trusts (NAREIT).

Different Types of Real Estate Investment Trusts

Real estate investment trusts (REITs) can be classified as either equity or mortgage. 

Real estate investment trusts (REITs) that are owned by shareholders typically oversee the management of their holdings. 

Mortgage REITs are involved in the real estate lending industry but do not own any properties. 

Equity real estate investment trusts are classified based on the property types in which they invest. 

The vast majority of REITs invest in multifamily buildings, mobile home parks, office complexes, retail malls, and industrial parks. 

Some others have hospitals, self-storage complexes, hotels, and other forms of real estate holdings. 

Long-term lease agreements are a major source of revenue for equity REITs. 

As a bonus, they reap capital gains from the sale of appreciated properties.

 

In contrast to traditional REITs, mortgage REITs (mREITs) do not hold physical real estate. 

Instead, they acquire mortgages from financial institutions and profit from the interest accrued on those loans. 

MREITs are more volatile than stock REITs and thus riskier, but they also provide greater dividends on average.

 

About a quarter of equity REITs are involved in retail, including the ownership of shopping malls, outlet centers, and other types of retail and service facilities. 

Indoor shopping malls are in a long-term decline that is predicted to continue. 

Many conventional stores have felt the effects of online retailers’ competitive pricing. 

Therefore, retail is considered one of the riskier REIT sectors, except REITs specializing in convenience stores, big-box discounters, and service providers like car repair shops.

Problems with REITs

The dividends investors receive from real estate investment trusts are typically taxed as regular income. 

As with capital gains, most people owe 15% in taxes on dividends received from ordinary corporations. 

Real estate investment trusts (REITs) typically incur a higher tax obligation than corporate dividends since ordinary income tax rates are typically higher. 

According to NAREIT, over 75 percent of dividends from REITs are taxed as regular income.

However, the total return, which includes dividends and price movements, might fluctuate widely. 

Real estate investment trusts (REITs) might be portfolio laggards at times. 

For instance, NAREIT estimates that equity REITs will lose 5.1% of their value in 2020. 

When compared to the S&P 500, the Russell 1000 index gained 21%. 

Mortgage REITs typically reduce their dividend payments when interest rates increase.

Tips for Investing in Real Estate Investment Trusts

Commercial real estate investment trusts (REITs) can be found on the New York Stock Exchange and the Nasdaq. 

You can acquire them through any brokerage, both offline and online, or through any trading platform, as they trade just like regular equities. 

The liquidity of REITs is comparable to that of other stocks, in contrast to the illiquidity that can accompany direct ownership of the real estate.

Investment in a real estate investment trust (REIT) requires careful consideration of many factors, including the rental revenue and lease terms of the underlying properties. 

Alternatively, you might put your money into a mutual fund or exchange-traded fund that invests in real estate investment trusts. 

These offer the same diversification and liquidity benefits as REIT shares, but with a far lower risk profile. 

Investors may choose to hold REIT shares in a tax-deferred account like an IRA because of the high income they generate.

To Sum Up

 

Investors who want easy access to the real estate market and a stable return on their money often like REITs. 

The shares are liquid, meaning they can be bought and sold quickly and easily, and they pay out dividends at rates at the top of the stock market. 

REIT dividends are taxed at the investor’s marginal rate, and like the rest of the real estate business, REITs can experience boom and bust cycles. 

Real estate investment trusts (REITs) come in a wide variety of shapes and sizes, so it’s crucial to know what you’re getting into before putting your money down.

 

Investing wisely in real estate investment trusts (REITs) involves knowledge of the business and its various factors because REITs are taxed and evaluated differently than other stocks. 

This is where the assistance of a financial counselor can be invaluable. 

It is not necessarily difficult to find a financial counselor. 

Use SmartAsset’s free matching tool to find local financial advisors in as little as five minutes. 

The time to get started is now if you want to be matched with local experts who can help you reach your financial objectives.

 

You need to determine your comfort level with risk before you invest. 

How secure you feel about certain assets can provide you with clues as to your risk tolerance.