This is a guest post by Hank Coleman who writes about retirement and investing on his blog, Money Q&A.
Have you ever wanted to invest in real estate but didn’t want to get your hands dirty flipping, fixing up properties, or finding tenants? There is a way to invest in real estate exactly as you would if you were investing in a mutual fund. A real estate investment trust provides you with a great type of investment that can help you diversify your portfolio while also providing you with the dividend stream that dividend investors have grown to love.
What Is A Real Estate Investment Trust (REIT)?
A real estate investment trust, also known simply as a REIT (pronounced ree-eat), is an investment company that typically owns and/or operates real estate or real estate related assets. REITs have the ability to invest in a wide range of real estate endeavors such as commercial properties, apartment complexes, hotels, shopping malls, office buildings, warehouses, mortgages, and other real estate assets. Typically, investors can purchase shares in the REIT almost exactly like you would purchase shares in a mutual fund. REITs provide investors who want to own real estate with an alternative investment to actually investing directly in the real asset itself.
Five Reasons Why I Love REITS
REITs Offer High Yields
Real estate investment trusts are a great alternative for investors who are looking for a higher yield. Since interest on savings accounts and returns on government bonds have been at incredible low rates for several years, many investors are continuing to seek out new investment opportunities with a decent rate of return. According to Kiplinger Personal Finance, REITs that own property have an average yield of 3.8%. And, it is not unusual to find some individual REITs yielding as high as 8% or more to investors depending on the type of underlying real estate assets held in the trusts. Many REITs can be found offering 5% to 6% yields consistently for five years or more.
90% Of Profits Distributed As Dividends
There are many rules that REITs must follow in order to qualify for special tax treatment and exemptions. In the United States, REITs must by law distribute 90% of their taxable income to their investors each year in order to be considered a REIT. REITs also must have at least 75% of their assets invested in real estate, government securities, or held in cash. Failing to follow these rules could result in a REIT losing its preferential tax status. In the United States, REITs do not pay corporate tax and pass the tax burden directly to individual investors who pay ordinary income tax on REITs’ capital gains and dividends that are distributed.
Good Tax Treatment
Even though capital gains and dividends received by an investor from a REIT are taxed at the investor’s ordinary income rate, real estate investment trusts’ good tax treatment as a corporation still give investors quite a unique benefit that is hard to find elsewhere. Because REITs pay no corporate income tax, they do not qualify for special treatment as qualified dividends which are typically taxed at 15% in the United States. Depending on your specific tax bracket, you as an individual may have a lower marginal tax rate than a REIT would if it was taxed at a corporation which results in more profit going directly into investors’ pockets.
REITs Offer Diversification
REITs offer investors an opportunity to increase the diversification of their portfolios. Typically, real estate in general and therefore REITs who hold real estate reduce investors’ risk and allow them to diversify their assets away from other investments that are more closely correlated with the financial markets such as stocks, bonds, and mutual funds.
A Liquid Investment
Unlike investing in an actual real estate asset like a rental house or condo yourself and tying up your money for years at a time, REITs provide investors with a great amount of liquidity. REITs operate exactly like a mutual fund with respect to the ability of investors to simply buy and sell shares of the REIT at any time. This allows you as an investor to move in and out of the real estate market when, where, and as quickly as you wish.
Real estate investment trusts allow you to invest in all kinds of different real estate assets without the mess of closing costs, lawyers, inspections, finding buyers or tenants, and the like. REITs are a great alternative investment that produces dividends and a high yield for investors who are looking for another way to find a good rate of return and diversify.
REITs for Canadian Investors
Here are a few posts on REITs for Canadian investors:
- My Own Advisor – Top Canadian REITs
- The Dividend Guy – 4 Top Canadian REITs for 2012
- Boomer & Echo – Are REITs Worth A Look For Yield Hungry Investors?
Hank Coleman is a finance writer who has written extensively for many financial websites and publications in addition to his own blog, Money Q&A. Hank holds a Master’s Degree in Finance and is currently studying to take the Certified Financial Planner exam.
If you enjoy reading the Dividend Ninja, don’t forget to also subscribe and get the Ninja delivered right to your inbox (and if you don’t like it – subscribe anyway). Thanks for reading!