3 Basics Real Estate Investment Trust Investing
3 Basics Real Estate Investment Trust Investing
Real Estate Trust Investment Definition
Let’s say that you are an investor, and you would like to purchase a Skyscraper or a Shopping Mall but you either don’t have the millions of dollars it would cost to buy one or you don’t want to spend the millions of dollars required on just one building.
A REIT is where you and other investors can get together and pool your funds to purchase either a single building that you would otherwise not be able to afford or to invest in a range of properties that you would otherwise not be able to afford.
There are 2 other important advantages to REITs:
- They are liquid – once you buy a shopping mall or even just a single residential investment property they can be very difficult to sell. It can take a long time and cost a whole lot of money. Often REITs are listed on Stock Exchanges so they can be easily bought and sold just like a stock in a company.
- REITs are professionally managed so you don’t have to worry about personally managing the property.
REITs vs Real Estate
REITs are very attractive if you want to invest in real estate without having to deal with the time and energy of managing your own property.
REITs are much more liquid and don’t require huge investment to get started which is a great benefit.
Investing in a property requires much more investment up front as wells as time and energy in managing and maintaining a property.
BUT it can potentially have a much higher ROI, which is the main benefit.
If you know your market well and find an undervalued property then real estate can be a great investment.
Buying property require patience and a long term horizon due to the high transaction costs of purchasing real estate.
Real estate is great if you’re a savvy investor and know how to find opportunities and or add value.
Also leverage is great.
For the majority of people that just want to put their money somewhere might as well park in REITs
REITs diversify risk much better and requires much less time and energy.
REITs and Taxes
REITs are basically high yield bonds.
They’re affected by interest rate increases and they’re taxable income because REITs have to pay out 90% of their income by law.
Invest in them the way you would invest in a high yield bond fund.
Reits all have high dividend yields so it makes the most sense to place them in retirement vehicles so you don’t have to pay income taxes on the dividends, which you would in a personal account.
If you want long term, put them in a Roth or 401k.
The new “Trump tax laws” now qualify REIT dividends as “pass through income” and allows a 20 percent deduction from said dividends. Also the hype about being taxed at regular rates is overblown: Assuming a 7 percent yield for the REIT (easily achievable), a 22 percent tax rate, and a 2.8 percent inflation rate the numbers come out to a 5.5 percent effective yield (after taxes, inflation, and factoring in the 20 percent deduction).
Even at the 37 percent tax rate the effective yield comes to about 4.7 percent.
Should I invest in REITs through my Roth IRA?
If you own an IRA, you can simply use your account to purchase equity shares (or debt shares, by buying bonds) of real estate-related businesses.
These could be publicly traded real estate development companies or mortgage companies, for example, or mutual funds or publicly traded REITs (real estate investment trusts) that are themselves invested in a basket of real estate businesses.
The No. 1 reason to use retirement accounts such as a Roth IRA is for the tax advantages they offer. And the best way to capitalize on the tax advantages is to fill your portfolio with high-quality dividend-paying stocks.
A good type of stocks to hold in your own Roth IRA are real estate investment trusts (REITs), which are already inherently tax-advantaged.
Specifically, as long as REITs pay out more than 90% of their net income to shareholders, their profits are not taxed at the corporate level.
This is the main reason REITs tend to pay higher dividends than most other types of stocks.
The catch is that if they’re held in a taxable brokerage account, much of your REIT dividends can be taxed as ordinary income, and not at the favorable “qualified dividend” rates of most stocks.
Of course, in a Roth IRA, your dividends won’t be taxed at all. So, by holding these stocks in your Roth IRA, you are avoiding taxation at both the corporate and personal levels — something you can’t do with most other types of dividend stocks.
REITs Financial Planning Financial Advisor
So REITs are a convenient way for investors to get access to real estate and get some immediate diversity, as well as income. If this sounds like a good fit for you, then a real estate investment trust may be an option that you want to consider.
If you’d like to discuss how this could potentially fit into your overall retirement savings plan, or how it would fit into your financial situation overall, please contact us at MintcoFinancial.com