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REITs are high-performing investments that allow shareholders to benefit from real estate investments without having to buy individual properties.
If you're looking for an investment similar to mutual funds that allows you to invest in properties, then consider a REIT (Real Estate Investment Trust). A REIT owns or finances income-producing real estate, and there are three types available.
The majority of REITs available to invest in are Equity REITs. Fewer than 10% of REITs available are Mortgage REITs and there are only a small number of Hybrid REITs. All REITs are tied to aspects of the real estate market, such as apartments, hotels, nursing homes, offices, and shopping centers.
A REIT's stockholders (shareholders) earn a share of the income produced by the real estate investment. Generally REITs pay out all of their taxable income in the form of dividends to their shareholders.
An investment company must do the following to qualify as a REIT:
You have a few options for purchasing REITs. Most REITs are listed on the major stocks exchanges. Currently, 195 REITs are available on the NYSE (New York Stock Exchange).
As an investor, you should consult with an investment advisor or financial planner who can recommend the most appropriate REIT investments based on your objectives.
Look for the following characteristics when searching for which REITs to invest in:
At the beginning of the year, REITs are required to provide their shareholders with an IRS Form 1099-DIV explaining how they will disburse the previous year's dividends for tax purposes.
REIT dividends qualify for lower tax rates in the following situations:
Tip: Considering the tax implications discussed here, you can see that it can become quite complicated. Once you have considered investing in a REIT and consulted with an investment advisor, it is equally important to choose a tax professional who is experienced in filing tax returns for people with diverse investments.
Equity REITs offer you diversification because their returns show little similarity to broader stock market returns over the long term.
|Dividends||Stable income stream|
|Liquidity||Easily bought and sold||Performance||Stronger performance than the S&P 500, Dow Jones Industrials and NASDAQ over most long-term horizons.||Transparency||Operate under the same rules as other publicly traded companies for securities regulatory and financial reporting purposes|
Essentially, you can benefit from a real estate investment without having to go out and buy or finance properties yourself.
If you invested $10,000 in combinations of stocks, bonds, and REITs on December 31, 1984, here's an estimate of what the value of each investment group would look like 30 years later on December 31, 2014 based on the average returns from each investment type over that period of time.
Considering this example, the third combination, with more exposure to REITs than the first two, had the best returns over the last 30 years.
While REITs have several advantages that make them attractive to investors, they also have a few disadvantages, including:
|Sensitive to Demand for Other Investments||When overall interest rates rise making Treasury Bonds a more attractive investment, people will be drawn away from investing in REITs thereby lowering their share prices.|
|Property Taxes||Property taxes that REITs must pay can represent up to 25% of their total operating expenses. The higher property taxes go, the higher this expense becomes.||Tax Rates||Taxes are due on REIT dividends you receive. The tax rates are usually higher than the 15% most other investment dividends are taxed.|
If you are a growth investor, then you may want to seriously consider investing in REITs. The real estate markets have consistently outperformed the stock market's S&P 500 over time. The real estate market has already recovered to post five-year returns following the financial crisis of 2008. In this high performing sector, REITs have been among the best-performing investments over the past 20 years.
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