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Are you looking to invest in real estate investment trusts (REITs)? If so, you may be asking yourself, “Are REITs a good investment?”
The answer is yes. REITs are excellent investments for both small and large investors.
Whether you are looking to increase your net worth or generate cash flow through dividend income, REIT investments offer many benefits.
This guide will discuss the advantages and disadvantages of REIT investments.
Why I Should Invest in REITs
REITs are popular investments for retail and institutional investors alike.
History of great returns
When it comes to investing, everyone wants to see a high return on their money. REITs can provide just that. REITs are noted for their long-term performance.
While REITs may occasionally underperform in the short term, they have historically outpaced stocks in total returns.
According to data published by FTSE NAREIT, REITs outperformed stocks 56% of the time in the last 20 years.
There are always inherent risks in investing. Investors should be mindful of these risks when selecting assets and take steps to manage them.
It is essential to diversify your portfolio to mitigate risks and maximize potential gains. Putting all your eggs in one basket can lead to losses if that investment underperforms.
You can protect yourself from market volatility or downturns. Another option that provides even more diversification to your investment portfolio is REIT index funds.
REIT index funds, such as those provided by Vanguard, attempt to match the REIT performance of a benchmark REIT index, and you’re investing in publicly traded REITs.
There are many types of REITs that investors can choose from:
Real estate investment trusts may be worth considering if you’re looking for steady income from your investments.
The law requires equity REITs to distribute most of their taxable income to shareholders.
REIT dividends are typically higher than other investment options, making them an attractive option for income-oriented investors.
In October 2022, FTSE NAREIT had a monthly dividend yield of 4.27% compared to the 1.63% dividend yield from the S&P 500.
When it comes to investing in an uncertain market, a guaranteed payment can be a true standout. Consistent distributions are why REITs are a popular choice for investors.
By law, REITs must pay 90% of its income to investors. Real estate investment trusts pay investors a steady dividend.
Liquidity is a crucial factor to consider when deciding whether you want to invest in an asset. Liquidity refers to how easily an investor can convert an asset into cash.
Liquid assets give investors flexibility during tough times when they may need cash fast.
If you’ve ever invested in real estate, you know it can take a long time to sell a property and turn a profit.
For example, let’s say you needed quick cash for a medical emergency. If you attempted to sell property you owned, you would have to seek and wait for a buyer, which could take time you might not have.
REITs are publicly traded on major stock exchanges, which makes them more liquid than traditional real estate investments.
Exchange-traded REITs are advantageous because investors can easily buy and sell shares, allowing immediate access to funds if necessary.
So, not only do REITs offer the potential for high returns and steady income, but their increased liquidity can also provide added flexibility for investors.
Open to all investors
One of the benefits of investing in REITs is the low barrier to entry. In the past, investing in commercial real estate was a privilege reserved for the wealthy.
However, in 1960, Congress made real estate more accessible by creating real estate investment trusts.
For the first time, retail investors could reap the benefits of real estate without having to own property. REITs made it easier for smaller investors to invest in income-producing commercial real estate projects.
REIT exchange-traded funds (ETFs) are publicly traded on major stock exchanges, making them even more accessible to the average investor.
As a result, REITs offer a valuable option for those looking to break into the real estate market without breaking their budget.
That said, bear in mind that some REITs demand that you are an accredited investor in order to take part.
This transparency allows investors to track their investments’ performance, and it provides accountability and oversight.
Real estate investment trusts provide investors with the opportunity to invest in a variety of real estate ventures, such as shopping centers and office buildings.
However, these investments can also come with certain risks, including a lack of transparency.
Fortunately, the Securities and Exchange Commission (SEC) requires REITs to adhere to specific rules and regulations aimed at increasing transparency.
For example, REITs must report quarterly financial statements and make them available to investors.
They are also required to provide information on their management structure and ownership stakes in properties.
In addition, REITs must have an independent board of directors who are responsible for overseeing financial reporting and auditing processes.
By adhering to these requirements, REITs are able to offer investors a clearer picture of their potential investments and minimize potential risks.
These SEC rules ultimately make participating in the REIT market a more transparent and secure experience for all involved.
Invest with a self-directed IRA
One way to invest in REITs is through a self-directed IRA. With a self-directed IRA, investors have the ability to choose alternative investments such as real estate, including REITs, for their retirement funds.
However, it is important to note that there are specific IRS rules and regulations that you must follow when investing with a self-directed IRA.
We recommend that you seek assistance from a qualified financial advisor or custodian before making any decisions.
Overall, using a self-directed IRA can provide more diverse investment options for retirement savings and the potential for long-term growth.
Why I Shouldn’t Invest in REITs
One potential drawback to investing in REITs is that they are subject to market fluctuations, just like any other investment.
In addition, REITs often have high expense ratios, which means that a larger percentage of returns may go toward operational and management costs.
It is important to thoroughly research and consider all factors before investing in REITs or other real estate investments.
No control over assets
Another downside to investing in REITs is that individual investors do not have any control over the properties owned by the trust.
The REIT’s managers make decisions regarding the sale, management, and acquisition of properties.
This lack of control can be a potential disadvantage for those who prefer to have a more active role in their real estate investments.
Furthermore, it may limit an investor’s ability to target specific property types or locations for their portfolio.
Ultimately, it is important to carefully weigh the tradeoff between convenience and lack of control when deciding whether to invest in REITs.
Taxed in dividend payments
Another potential drawback is that dividends received from the trust are taxed as regular income, rather than at the lower capital gains rate.
This can result in a significant amount of taxes for investors with high dividend earnings, reducing their overall returns on investment.
It is important to consider this factor and any potential tax implications before deciding to invest in REITs.
It may also be beneficial to consult with a qualified financial advisor.
REITs may also be subject to economic risks, such as changes in interest rates and a potential recession or stock market crash.
A recession or stock market crash could also decrease demand for real estate and lead to lower returns for REIT investors.
It is important to consider these potential economic risks when deciding whether to invest in REITs.
Consulting with a qualified financial advisor can provide guidance on navigating these potential risks.
Avoiding non-traded REITs
Investors should always invest in publicly traded REITs. The following risks are associated with non-traded REITs:
- Higher potential for fraud
- Excessive costs and fees
- Unspecified assets or properties
How to Invest in REITs
Today, investing in REITs has never been easier. There are several options for those looking to dip their toe into the world of REIT investing.
One way to invest in REITs is through direct ownership of shares. You can accomplish this by buying stock in a REIT on a public exchange or through private investments in individual REIT properties.
Another option is to invest in REIT mutual funds or exchange-traded funds, which allow individuals to diversify their portfolio without the risk and burden associated with individual property ownership.
These platforms pool together funds from investors to purchase and manage properties, offering the potential for higher returns with lower individual risk.
Ultimately, the best method for investing in REITs will depend on an individual’s specific goals and financial circumstances.
Are REITs a good investment? Yes. REITs have the potential for high returns and steady income, and they offer added transparency and diversification for investors.
However, as with any investment, there are risks involved and individual situations may vary.
Seeking investment advice from a financial advisor can provide guidance and personalized advice for navigating real estate investments.
If you’re looking to invest in REITs, use the tips provided in this post to make an informed decision.
Here are some commonly asked questions about REITs.
Who should invest in REITs?
REITs are great investments for all investors who want to earn passive income, seek long-term returns and achieve portfolio diversification.
Are REITs a good investment during inflation?
Yes. While past performance can’t guarantee future performance, REITs typically do well during times of high inflation.
Are REITs taxed as ordinary income?
Yes. While REITs are not taxed as ordinary income, the dividends received are taxed as ordinary income up to a threshold.