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If owning real estate is a dream of yours, but you don’t have the capital to purchase an entire property now, then investing in a REIT could be the perfect solution for you.
A REIT, or real estate investment trust, is a company that owns income properties and allows consumers to purchase partial ownership of these properties. They are crowdfunded investment properties. The company manages, operates, and owns the properties; then pays its investors dividends upon their investments based upon the income generated from the rental income or sale of the properties. This allows you to become a real estate investor without having to be a landlord.
There are five basic types of REITs. They are:
Believe it or not, but there are well over 200 REITs to choose from. Many are publicly traded REITs. These are the easiest to invest in because they are available through most stockbrokers and stock exchange websites. There are even companies that allow the purchase of REIT investments on their websites. (However, the SEC strongly recommends choosing REITs that are registered in order to avoid fraud and theft.)
Equity REITs do not require a qualified financial advisor or becoming an accredited investor, which means anyone can purchase them. The initial investment is usually smaller for these as well.
There are also REIT mutual funds and EFTs available, these have the added benefit of providing more liquidity than traditional REIT investments. These mutual funds and EFTs may include investments in real estate stocks and indices as well.
Private REITs are more difficult to invest in. They require an accredited financial advisor to make the investment and generally need a more significant initial investment. Often there are net worth and income minimums that must be proven to become an accredited investor, this must happen before investment can occur. This can be cost-prohibitive for many beginning investors.
REITs earn money the same way a stock does. Your investment is used to purchase a portion of the property or mortgage; as the property increases in value or the mortgage begins to earn interest, the value of the stock you purchased becomes worth more. This additional value is then distributed through dividends back to the shareholders. According to Nareit, over the past 40 years, the publicly-traded REITs typically earned 11.28% interest. mREITs earned only 5.02% over the same period.
Of course, as with any investment, there is volatility and risk involved. When considering investing in a REIT, it is better to think long term, rather than short term. Over time, real estate is a very safe investment – but as the crash of 2008 showed us, it can also have major market dips.
Yes. REITs function just like stocks. They are an excellent option for earning passive income because a one-time investment can be allowed to sit and grow with minimal monitoring or effort from the investor. 90% of a REIT’s taxable income must be paid out to shareholders, this means that the shareholders get the lion’s share of the income generated.
Real estate in general is considered to be one of the safest long term investments. Because REITs allow for smaller contributions to begin, they are an excellent way to begin saving for retirement and should be strongly considered in asset allocation and portfolio planning.
One of the only downsides to REIT investing is that the income from REITs is taxed normally, it is not considered a capital gain. Typically, with income generated from assets – like stocks and investments, there is a special designation that allows it to be taxed at a lower rate than your earned income. Unfortunately, the income from REITs is taxed as if it were earned income, not the passive income tax – which is also known as capital gains tax. This means it has a higher tax rate. If you are in a higher tax bracket, based upon your income, this can be a significant drawback for you. However, because it is not taxed as a capital gain, there is some portion of the tax that can be written off – about 20%.
In addition to the income received from REITs, short term and long term capital gains apply at the time of the sales of REIT shares.
For all up to date information in regards to REITs and taxation please reference the irs.gov website or consult with a tax professional.
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REITs are an excellent way to begin investing in real estate. These REITs have all the benefits of traditional real estate ownership, without the effort and hassle of being a landlord, and the upfront costs of real estate ownership. They have a proven track record of growth with an average of over 5% per year over the last 40 years, higher liquidity than traditional real estate investments, and are a relatively safe investment over time. REITs are a great way to diversify your investment portfolio, earn passive income, and become a real estate investor.
If you’re interested in learning more about real estate investing, click the following link to my dedicated page on real estate.
What are your thoughts on REITs? Are you considering investing in them? Are you already investing in them? Please share your thoughts in the comments section below.
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