There are a number of ways you can invest in real estate, but direct purchases typically provide a substantial return on investment, in addition to some great tax benefits as well.
A real estate investment trust, also known as a REIT, is a company that owns, operates, and potentially finances income-generating real estate. This scenario allows individual investors to purchase a share of commercial real estate assets. This can include retail properties, office buildings, apartment complexes, and more.
Let’s take a look at some additional information about REITs, as well as their pros and cons.
The Different Types of REITs
There are several different types of REITs that investors should be aware of. They include:
Equity REITs. This is the majority of REITs. They offer equity ownership stakes in a diverse collection of properties. Investors will receive a share of the profits.
Mortgage REITs. This form of a REIT provides financing for real estate asset purposes. By investing in residential mortgages instead of commercial ones, loans can be bought for anything that might produce an income.
Private REITs. This form of non-traded REIT follows a certain set of rules, including only being able to sell shares to accredited investors. Private REITs are not traded on public exchanges.
The Pros of Investing in REITs
Below is a list of some of the most significant pros investors should consider when deciding if they want to pour their money into REITs.
Fast Exposure to Real Estate
REITs have become a popular investment option for both individuals and large-scale investors. As long as you have a brokerage account and the financial ability to invest, this is a great way to get fast entry into the real estate market while earning some profit.
Creating a Diverse Portfolio
REITs allow you to develop a diverse portfolio of real estate assets. You can move away from more traditional forms of investment such as mutual funds and stock market trends. You can choose from retail REITs, as well as office, healthcare, and residential options.
An Impressive Return on Investment
REITs increase in capital appreciation quite quickly, and they provide the opportunity to generate returns for shareholders. You do not have to invest much in order to make a good profit.
High Dividend Yields
The IRS requires that REITs must pay out a minimum of 90 percent of income and profits in the form of dividends. It’s a much higher dividend yield when compared to other investments.
The Cons of REIT Investments
There are always risks associated with investment opportunities. Below are some of the cons to consider.
The dividends that are received from REITs are subject to income tax, taxed as standard income. While there are tax benefits associated with REITs, investors that have large stakes may need to expect a hefty tax bill.
There are high fees associated with REITs, as well as sales commissions. There is also the potential for annual management fees.
There will inevitably be trends in real estate that can affect REITs. A key example would be the current landscape that we are in regarding the need for office space. More people are now working from home, which reduces the need for companies to lease out office space.
As a potential investor, it’s always a good idea to weigh your options of a potential investment before you make a final decision. This helps you determine if this is a good option for your investment objectives or not.