What are Real Estate Investment Trusts (REITs)?
Real Estate Investment Trusts are companies that aim to own and operate real estate. Some invest in commercial properties like parking lots or office buildings, while others invest in residential properties like apartments or houses. By law, REITs must distribute 90% of their profits as dividends to investors quarterly, making them a good option for retirees seeking steady income.
Risks of Real Estate Investment Trusts
REITs are traded on the stock market, which means they carry similar risks to stock investments. Property prices rise and fall in response to external influences, fundamentals, and a variety of other market forces. Consequently, REITs will reflect any weakness and its impact on prices.
Returns of Real Estate Investment Trusts
According to the MSCI US REIT Index, the total returns for REITs in the United States reached 7.76% in February 2022, with 10-year returns at 9.6%. In 2021, annual returns were 43.06%, one of the best annual returns in financial history. Returns were -7.57% in 2020, one of only two years with negative returns since 2008. The 9.6% return is comparable to the historical average annual return of the S&P 500 Index (about 10%).
How to Invest in Real Estate Investment Trusts
You can invest in REITs in several ways. There are mutual funds, closed-end funds, and exchange-traded funds (ETFs) to choose from. Some popular ETFs focused on REITs include: iShares U.S. Real Estate (IYR), Vanguard Real Estate (VNQ), SPDR Dow Jones REIT (RWR), iShares Cohen & Steers REIT (ICF).
You can also open a brokerage account and purchase individual REITs directly. Some large individual REITs include: Simon Property Group (SPG), Public Storage (PSA), Equity Residential (EQR), Healthpeak Properties (PEAK), Ventas (VTR).
There is also a growing number of ways to access foreign REIT markets. These investments are usually riskier than US REITs but may offer higher returns – and since they are overseas, they provide diversification for a portfolio heavy in domestic real estate. One example of such an ETF is the Vanguard Global ex-U.S. Real Estate Index Fund ETF (VNQI).
Real Estate Investment Trusts in Portfolio Building
REITs tend to have a lower correlation with other areas of the market. While they are affected by general market trends, you can expect their performance to lag somewhat behind major stock and bond indices. This performance can be used to make them an effective hedging tool, although they may not be as effective as bonds or commodities.
You can use REITs to reduce the overall volatility of your portfolio while at the same time increasing its returns. Another advantage of REITs is that, unlike bonds that are purchased at issuance, they have the potential for long-term capital appreciation.
REITs may perform better than some other investments during periods of inflation because property prices generally rise with inflation. REIT dividends, unlike capital gains from securities held for at least one year, are fully taxable. It is always wise to discuss your asset allocation decisions with a trusted financial advisor.
Frequently Asked Questions (FAQs)
How are REITs taxed?
REIT income can be taxed as ordinary income, capital gains, or return of capital. Most dividends can be treated as ordinary income. The REIT will inform you if any part of the distribution is capital gain or loss. Capital gains tax rates are typically 0%, 15%, or 20%, depending on the investor’s income.
What
Are Mortgage REITs Real Estate Investment Trusts?
Mortgage REITs do not own properties directly. Instead, they invest in mortgages, mortgage-backed securities, and related assets. Profits are paid from the interest earned on the mortgages and other assets. Equity REITs own properties directly.
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Source: https://www.thebalancemoney.com/what-are-reits-416837
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