Are REIT's Right for You?
You can own real estate without having to be a landlord.
What is a REIT? A real estate investment trust (REIT) is a real estate investment company that manages a portfolio of income properties, distributing the lion’s share of its profits as dividends. By getting into a REIT, you can gain an ownership interest in prime commercial real estate … without the headaches of commercial real estate management.
How do REITs work? On one level, a REIT is an agreement with the IRS. In choosing a REIT structure, a real estate investmentcompany agrees to pay out 90% or more of its taxable profits in dividends in exchange for avoiding corporate income tax.1
In the typical public REIT, investors buy shares in the trust. (You may have heard the term “real estate stock” before;that’s what we’re talking about.) Like any other stock, REIT stock offers you the potential for dividend income and sharevalue appreciation. REIT dividend income tends to be stable, as REITs usually invest in large commercial properties involvinglong-term tenant leases. The REIT may choose to make some of the dividend a nontaxable return of capital, which results intax deferral and a lower taxable income for the investor during the period he or she holds the stock. That can boost the after-tax dividend yield. REITs don’t pass their losses onto investors, and they usually don’t have minimums.2
Non-traded REITs. Most REITs are listed on stock exchanges, but not all are. Some REITs are non-traded (or “non-listed”).Non-traded REITs are akin to private equity funds in that they are usually conceived to last less than 10 years beforelisting their shares, selling out, or liquidating. They typically invest aggressively when they start buying assets, andtheir dividend yields can be notably higher than those from publicly listed REITs.3
Are REITs right for your portfolio? Many investors are considering REITs these days, attracted by the diversification theyprovide for a portfolio. Notably, there are REIT mutual funds, closed end funds, and REIT ETFs to choose from, among severaloptions. Before you make the move to invest in a REIT, be sure to speak with a qualified financial advisor who knows theparticulars surrounding REIT investment.
*Be advised that investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. As a result, the values of real estate may fluctuate resulting in the value at sale being more or less than the original price paid.
Neither Bruce Kuczinski nor Royal Alliance Associates, Inc give tax or legal advice. All information is believed to be fromreliable sources; however, we make no representation as to its completeness or accuracy. Please consult your FinancialAdvisor for further information.
Citations. 1 investopedia.com/articles/04/030304.asp
2 moneycentral.msn.com/quickref/quickref.asp?cat=10&qamode=2&reftype=0&selcat=3&sub=4&topic=8
3 nareit.com/portfoliomag/08marapr/feat2.shtml
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