Investing in Real Estate Investment Trusts
REITs trade on a public stock exchange and offer investors exposure to real estate without the headaches of maintaining physical property, such as toilets, tenants, trash and fire. REITs must invest at least 75% of their assets in real estate or cash and must return 90% of taxable income to shareholders each year in dividend payments.
Real estate
REITs typically own income-producing real estate, such as office and apartment buildings, warehouses, shopping centers, commercial forests, hotels and hospitals. Some REITs also engage in financing real estate.
These companies are registered with the Securities and Exchange Commission (SEC) and must meet certain requirements. Generally, they must invest at least 75% of their assets in real estate and derive most of their revenue from rents on the properties they own or interest on mortgages used to finance them.
Some REITs are publicly traded, while others are not. Non-traded REITs are often less transparent and can charge high upfront fees that eat into the value of your investment. Additionally, it can be difficult to know how well a non-traded REIT is performing until years after you’ve invested in it. This can be a major headache for investors, especially if the REIT is losing money.
Dividends
The dividends held by REITs include rental income and capital gains. They must payout at least 90% of their taxable income each year. This money is then passed through to shareholders, who pay income taxes on the dividends. REITs can raise funds from investors through a variety of means, including public offerings and private placements.
Most REITs focus on a specific type of real estate. Investors looking for exposure to commercial real estate can buy shares of a REIT that owns data centers, such as Digital Realty Trust (DLR). Those bullish on e-commerce growth can invest in REITs that own warehouses where products are stored before reaching end customers, such as STAG Industrial REIT (STAG).
REITs offer a great way to diversify your investment portfolio by offering exposure to commercial property without the significant cost and risk associated with purchasing individual properties. They also have long track records of delivering stable and growing dividends, which can mitigate any volatility in the real estate market.
Taxes
Some REITs purchase property and lease it to tenants, generating income from rents. Other REITs buy and sell mortgages that finance real estate transactions, earning interest income as a result. They also pay out dividends to shareholders. The tax treatment of REITs is similar to that of corporations. REITs are required to distribute 90% of their taxable income each year.
REITs must use the Electronic Federal Tax Payment System to make deposits of employment and excise taxes. They can also have their tax professional, financial institution, payroll service, or other third party make these deposits on their behalf. These third parties may charge a fee for these services.
REITs must round off all amounts to whole dollars on their returns and forms. They must also round off cents to whole numbers or drop them below 50 cents. This makes completing the return easier. A REIT can also ask its tax professional to help it determine the proper rounding amounts.
Liquidity
REITs offer a great way to diversify your portfolio without having to buy and maintain a single real estate property. They also provide professional management and lower investment ticket sizes than individual properties. However, there are a few important considerations to keep in mind before investing in REITs.
Liquidity is the ability to quickly sell an asset or security without significant losses to its value. It is usually expressed as a ratio or percentage, and can give insight into a company’s financial health.
Public REITs that are listed on a stock exchange or traded in the same way as other securities, such as mutual funds and ETFs, are very liquid. However, private REITs are often illiquid because they can’t be sold easily on the open market. This may make them a poor choice for investors who need to sell their investments quickly or for whom high sale taxes are an issue. Also, private REITs may require more extensive due diligence than other REITs.