Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. These REITs typically trade under substantial volume and are considered very liquid instruments. Most REITs have a straightforward business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.
Mortgage REITs don't own real estate, but finance real estate, instead. These REITs earn income from the interest on their investments. These requirements include to primarily own income-generating real estate for the long term and distribute income to shareholders.
Specifically, a company must meet the following requirements to qualify as a REIT:. There are three types of REITs:. REITs can be further classified based on how their shares are bought and held:. REITs are also included in a growing number of defined-benefit and defined-contribution investment plans. An estimated million U. As of , REITs collectively hold more than half-a-million individual properties.
REITs can play an important part in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation. As with all investments, REITs have their advantages and disadvantages. On the plus side, REITs are easy to buy and sell, as most trade on public exchanges—a feature that mitigates some of the traditional drawbacks of real estate.
Performance-wise, REITs offer attractive risk-adjusted returns and stable cash flow. Also, a real estate presence can be good for a portfolio because it provides diversification and dividend-based income—and the dividends are often higher than you can achieve with other investments. On the downside, REITs don't offer much in terms of capital appreciation.
It's also a good idea to check out the broker or investment advisor who recommends the REIT. The SEC has a free search tool that allows you to look up if an investment professional is licensed and registered. Another consideration when choosing REITs is to look at the sectors of the real estate market that are hot. Which booming sectors of the economy, in general, can be tapped into via real estate?
As an example, healthcare is one of the fastest-growing industries in the U. Several REITs focus on this sector. Its portfolio focuses on three core asset classes: life sciences facilities, medical offices, and senior housing, owning interests in more than properties. A REIT is organized as a partnership, corporation, trust, or association that invests directly in real estate through the purchase of properties or by buying up mortgages. REITs issue shares that trade stock exchange and are bought and sold like ordinary stocks.
As a result, REIT companies are often exempt from most corporate income tax. Shareholders of REITs who receive dividends are taxed as if they are ordinary dividends. It is so-named because it involves two different entities that are "clipped" together via an agreement where one entity owns the properties and the other manages them. It is similar but more flexible in structure to a "stapled REIT". Securities and Exchange Commission. Internal Revenue Service.
Bureau of Labor Statistics. Common Stock. Healthpeak Properties. New York Times. Real Estate Investing. Your Money. Personal Finance. Your Practice. Publicly traded REITs offer investors a way to add real estate to an investment portfolio and earn an attractive dividend.
Publicly traded REITs are a safer play than their non-exchange counterparts, but there are still risks. In a rising-rate environment, investors typically opt for safer income plays, such as U. Treasuries are government-guaranteed, and most pay a fixed rate of interest.
As a result, when rates rise, REITs sell off and the bond market rallies as investment capital flows into bonds. However, an argument can be made that rising interests rates indicate a strong economy, which will then mean higher rents and occupancy rates. For example, suburban malls have been in decline.
As a result, investors might not want to invest in a REIT with exposure to a suburban mall. With Millennials preferring urban living for convenience and cost-saving purposes, urban shopping centers could be a better play. Trends change, so it's important to research the properties or holdings within the REIT to be sure that they're still relevant and can generate rental income.
Although not a risk per se, it can be a significant factor for some investors that REIT dividends are taxed as ordinary income. In other words, the ordinary income tax rate is the same as an investor's income tax rate, which is likely higher than dividend tax rates or capital gains taxes for stocks.
In , REITs collectively held in excess of , individual properties. In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments. If a REIT is concentrated in a particular sector e. Some investors may be defrauded by bad actors trying to sell "REIT" investments that turn out to be scams. This provision allows REIT companies to have exemptions from most corporate income tax.
REITs dividends are taxed as ordinary income to shareholders regardless of the holding period. Investing in REITs can be a passive, income-producing alternative to buying property directly. However, investors shouldn't be swayed by large dividend payments since REITs can underperform the market in a rising interest-rate environment.
Instead, it's important for investors to choose REITs that have solid management teams, quality properties based on current trends, and are publicly traded. It's also a good idea to work with a trusted tax accountant to determine ways to achieve the most favorable tax treatment.
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Generally, companies that invest a majority of their assets in real estate are exempted from the rules that govern investment companies, such as mutual funds. Each real estate investment trust shall each taxable year comply with regulations prescribed by the Secretary for the purposes of ascertaining the actual. 7. REITs should generally be considered long-term investments This is especially true if you're planning to invest in non-traded REITs since.