REITs Make Owning Properties Like A Mogul Easy
Imagine owning properties all over the world, collecting rent, and never having to deal with the pesky issues of tenants that stem from being a landlord. Sound’s crazy? Maybe not. There’s a way that this is absolutely possible.
Invest like a mogul
That way relates to what are called real estate investment trusts, or REITs. These investment vehicles make it possible to own property, and reap the financial benefits of doing so, without suffering the headaches of being a landlord.
You may not have the millions of dollars that most real estate moguls boast having in their financial coffers, but that doesn’t mean you can’t boast owning the same lucrative properties. With REITs, you can own the same holdings as the institutional moguls, but just of course, on a smaller ownership scale.
With REITs, you own all kinds of real estate ventures. These include residential and commercial properties. So, if you want to own a shopping mall filled with high-end retailers, a REIT could make that happen.
The same is the case for a five-star hotel, trauma-level hospital, office building or even a casino. REITs allow investors of all income levels and net worths to have ownership in all types of real estate. While you may not be a millionaire real estate mogul, REITs allow you invest diversely across different property types just like many of them do.
REIT types
Think of a REIT as a mutual fund. A REIT functions as a basket holding properties of all sizes and kinds. One of the most famous examples of a REIT is the Empire State Building. It’s a part of the Empire State Realty Trust.
This trust is considered to be the REIT type referred to as equity. There are three main types of REITs:
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Equity, which include office buildings
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Mortgage, which includes residential properties
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Hybrid, which is a combination of equity and mortgage
Notes Investopedia, “mortgage REITs in general are less highly leveraged than other commercial mortgage lenders, using a relatively higher ratio of equity to debt to fund themselves.”
Pluses of REITs
REITs are considered to be total return investments. Among their chief benefits are the high dividends they pay out and their long-term capital appreciation. In fact, it is thought that the long-term returns of REIT stocks are typically similar to those of value stocks, and more than the returns of lower risk bonds, according to REIT.com.
Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. These are the characteristics of real estate investment.
REIT.com
REITs can also do wonders for those who are trying to hedge against market volatility. This is partly due to their liquidity. They can be positioned so that you can liquidate them quickly without incurring hefty costs.
REITs can also help you hedge against inflation. This is because their cash flows and dividends are tied to the rents for the properties. When real estate prices rise, their rents and values tend to go up, too. This inflationary rise can be hedged with REITs because they can be a reliable source of income.
The tax man
While the total return investments of REITs are attractive, there are some things to keep in mind when considering investing in them. The first relates to taxes.
The taxes largely relate to the dividend payments you receive. REITs don’t pay taxes at the corporate level, but as an investor in one, you are responsible for paying taxes at your individual tax rate. This rate is based on what is referred to as the ordinary income portion of the dividend.
It’s also noteworthy when you actually have to pay taxes on your REIT investment.
Morningstar notes:
The portion of the dividend taxed as capital gains arises if the REIT sells assets. Return of capital, or net distributions in excess of the REIT’s earnings and profits, are not taxed as ordinary income, but instead applied to reduce the shareholder’s cost basis in the stock. When the shares are eventually sold, the difference between the share price and reduced tax basis is taxed as a capital gain.
Morningstar
Note: This article originally appeared at KINFO.
Category: REITs
