Real estate investment trusts (REITs) offer a way to invest in real estate without having to actually own or manage any property. They are a type of security that allows you to pool your money with other investors and then use that money to purchase, operate, and finance income-producing real estate.
REITs can be a good addition to any portfolio because they offer the potential for high dividends and long-term capital appreciation. And, because REITs must pay out at least 90% of their taxable income as dividends to shareholders, they offer a unique tax advantage.
However, before investing in REITs, it’s important to understand how they work and the risks involved.
A REIT is a company that owns, operates, or finances income-producing real estate. These companies are required to pay out at least 90% of their taxable income as dividends to shareholders.
There are two types of REITs: equity REITs and mortgage REITs. Equity REITs own and operate properties, while mortgage REITs lend money to property owners and investors.
Most REITs are publicly traded on major exchanges, which makes them easy to buy and sell. However, there are also non-traded REITs (NTRs), which are not listed on an exchange. NTRs are typically sold by brokerages and investment firms.
Like any investment, there are risks involved with investing in REITs. The most common risks include:
– Interest rate risk: When interest rates rise, the value of mortgage-backed securities held by mortgage REITs usually falls. This can cause the share prices of these REITs to drop.
– Inflation risk: If inflation increases, it can eat into the dividends paid out by REITs. This is because the cost of operating and maintaining properties usually goes up along with inflation.
– Credit risk: This is the risk that a borrower will default on a loan. This is a particular concern for mortgage REITs, which could suffer losses if borrowers default on their loans.
Despite these risks, REITs can be a good addition to any investment portfolio. They offer the potential for high dividends and long-term capital appreciation. Plus, they provide a unique tax advantage.
If you’re thinking about investing in REITs, be sure to do your research and consult with a financial advisor to ensure that they’re right for you.
REITs offer a number of benefits, including:
– Potentially high dividends: Because REITs are required to pay out at least 90% of their taxable income as dividends, they offer the potential for high dividends. In fact, the average dividend yield for equity REITs was 4.3% in 2018.1
– Long-term capital appreciation: Over time, the value of REITs has tended to increase. For example, between 2000 and 2018, the FTSE NAREIT All REIT Index (an index that tracks the performance of all publicly traded REITs) rose an average of 7.4% per year.
– Diversification: REITs can help diversify your portfolio because they tend to perform differently than other types of investments, such as stocks and bonds.
– Tax advantage: Because REITs must pay out at least 90% of their taxable income as dividends, they offer a unique tax advantage. The dividends paid by REITs are taxed at the shareholder’s marginal tax rate, which is often lower than the corporate tax rate.
Despite these benefits, it’s important to remember that REITs are not without risk. Be sure to do your research and consult with a financial advisor before investing.