For Mark Roberts’ Use: Have you ever considered investing in real estate, such as a rental house, vacation home, or apartment building? It may be a good idea to generate income and shelter some of your assets from taxes, but this type of investment typically requires substantial capital. Even if you have the that kind of cash (or credit), you may not want the responsibility that comes with managing a property.
There is actually another way to invest in the real estate market! Exchange-traded real estate investment trusts (REITs) allow investors to buy shares of income-producing real estate in a manner similar to purchasing stocks and bonds. Almost 40 million Americans invest in REITs through pension and retirement plans, and many others invest outside of such plans.
A REIT combines capital from investors to purchase and manage real estate properties, ranging from shopping malls, apartment buildings, and medical facilities to self-storage facilities, hotels, cell towers, and timberlands. This type of REIT, which derives most of its income from rents, is called an equity REIT. Another type of REIT, called mortgage REITs, derive most of their income from interest on mortgage loans.
According to the federal tax code, a qualified REIT pays at least 90% of its taxable income each year in the form of shareholder dividends. REITs generally do not retain earnings, and may provide a reliable income stream regardless of the price performance of their shares. This might look attractive to you, if you’re looking for higher yields than might be obtained from stocks or bonds.
REIT share prices do not necessarily rise and fall with the stock market, so they may help to balance your portfolio and offer an alternative opportunity for potential growth. As with all diversification methods, a REIT may manage your risk but does not guarantee a profit or protect against investment loss.
REIT distributions are taxable to the extent they include any ordinary income or capital gains. Some REITs might not qualify as a REIT as defined in the tax code, which could affect operations and negatively affect their ability to make distributions.
Just as with all stocks, REIT shares fluctuate with changes in market conditions. Shares may be worth more or less than their original cost when you sell them. As with all real estate investments, REITs come along with inherent risks such as deterioration of the economy, tenant defaults, property mismanagement, reduction in demand for rent space, operating costs and expenses, and the cost of compliance with laws and regulations.
Real estate investments are not appropriate for all investors, so do your research before investing. But depending upon your goals and risk tolerance, a REIT could play an important role in your portfolio.