2018-2019 How to invest in REIT
REITs are sold like stocks, and they’re held by many individuals and institutional investors.
You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. Most of it gets passed on to investors.
REITs are like mutual funds that own a wide variety of companies that build, own and manage commercial properties. Examples: shopping centers, parking lots and garages, condominiums, housing developments and even factories.
Real estate investment trusts (REITs) have been one of the top-performing asset classes of the past few decades, and in fact, the very best one over the past 15 years.
These owners of commercial real estate — apartments, office buildings, strip malls and more — offer high yield potential. That’s because to qualify for certain lofty tax benefits, they have to kick out at least 90% of their taxable income in the form of dividends to shareholders. Typically, REITs throw off high yields between 4% and 7%.
And as rents have increased over the years, so have REITs’ cash flows, and so have their dividends.
Can you make money in REITs? The historical evidence is positive. (But it’s equally true that you can lose money in REITs, so it pays to look before you jump.)
In the last analysis, REITS are an easy way to gain access to real estate investments. Yet, like any other financial investment, the future is not guaranteed. You may find ups and downs in the value of your REIT investment-and that is why it’s crucial to maintain a diversified portfolio, with exposure to various types of financial investments.
REIT Simple Tax Treatment
Unlike most partnerships, tax issues for REIT investors are fairly straightforward.
Each year, REITs send Form 1099-DIV to their shareholders, containing a breakdown of the dividend distributions.
For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital. As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend.
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.
Studies have shown that adding REITs to a diversified investment portfolio increases returns and reduces risk since REITs have little correlation with the S&P 500.
How to start investing in REITs
Getting started is as simple as opening a brokerage account, which usually takes just a few minutes.
Then you’ll be able to buy and sell REITs just as you would any other stock.
Because REITs pay such large dividends, it can be smart to keep them inside an individual retirement account so you don’t have to pay taxes on the distribution.
If you don’t want to trade individual REIT stocks, it can make a lot of sense to simply buy the whole real estate industry as part of an exchange-traded fund or mutual fund. You get immediate diversification and lower risk.
Many brokerages offer these funds, and you can start without knowing a lot about REITs while still collecting their juicy dividends.
If you need help to set up or to discuss many options in REITs call us at 813-964-7100
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We at Mintco Financial have been helping many investors to diversify their portfolio with options in REITs.
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