Why You Should Invest in REITs
Real estate investment has been a dirty term since the unfortunate market crash of 2008. Many people are wary of this asset class and choose to stay away from it. When it comes to investing, however, they rarely is a 100 percent risk proof venture. There are however steps that you can take to ensure that the losses that you incur are significantly lower.
This is why real estate investment trusts or REITs are the solution to this problem. With REITs, you can take measures to safeguard at least some of the investment that you make. This makes real estate a slightly less risky venture.
What You Need to Know
REITs can draw parallels to a mutual fund. It is merely a medium through which investors can gain proprietorship in real estate investments. These financiers also have the option to own and even administrate a number of establishments within this asset class.
There are certain requirements for an REIT. For instance, a trust must have a minimum of one hundred shareholders. Of these investors, no five can hold more than 50 percent of the shares between them. Three-fourths of the trust must be devoted to real estate, money, or the U.S. Treasury. At least 75 percent of the income of the REIT must come from real estate.
Advantages of REITs
These trusts produce a considerable amount of yield. The average dividend yield for a REIT is between 7 and 8 percent. These types of trusts usually do more than they are predicted to do. This means that the stock prices remain lower while the yields are higher. These dividends are also protected by stable rents from leases with extensive terms. REIT managers are also known for using conservative leverage on the balance sheets.
There are also considerable tax benefits to REITs. REITs are not taxed at a corporate level. Instead, investors pay individual tax rates for the percentage income of their dividend. In the event of return of capital that exceed the REIT’s income and revenue, they are joined to the investor’s cost basis in the stock. Once the shares are sold, the discrepancy between the share price and the reduced tax rate is taxed as capital gain.
The stability of REITs lies within its poor correlation to other asset classes such as the stock market. This results in a diversification of any portfolio. When the traditional asset classes are performing badly, the REIT will typically do better. This will result in your portfolio being much more stable, minimizing the losses that you incur.
It is also better to invest in an REIT rather than in real estate directly. This is because of the manner in which these two assets are purchased. REIT shares are purchased and sold on a stock exchange. The buying of actual real estate, however, is a considerably more arduous process. It will also be much more expensive, in the long run.
REITs are a great way to invest in the real estate market without actually being responsible for any real estate. The profit that you can make from such an investment is also greater. Furthermore, by investing with other people you are reducing the amount of the risk associated with the venture.
