Investing in REITs, particularly those that are publicly listed, has several advantages: REITs provide some of the highest dividend yields in the stock market since they are mandated to return 90 percent of their annual income to shareholders in the form of dividends.
Is it possible to lose money on REITs?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
What are the prospects for REITs in 2021?
Real estate investment trusts are coming off one of its best years in decades, but the sector may not be able to duplicate its success in 2022.
According to statistics from real estate analytics firm Green Street cited by The Wall Street Journal, the FTSE NAREIT Equity REITs index was up 36 percent this year through December 23. These estimates are ten percentage points more than the S&P 500’s gains in 2021.
The REIT index is on track to have its greatest year since 1976 in terms of absolute performance. Some trusts, though, did better than others.
According to the Journal, total gains on industrial REITs have surpassed 40% since the outbreak began. Self-storage landlords have seen even higher total returns, with returns exceeding 80%. On the other hand, properties such as office buildings, malls, and hotels have struggled as a result of lockdown orders in such businesses.
The Journal polled analysts, and they slammed the brakes on projections for a similarly good 2022 for REITs.
Green Street said that portion of this year’s profits were due to a return from 2020. Maintaining the sector’s momentum into the next year could be difficult, given the year’s comeback from extraordinary circumstances.
What is the typical REIT return?
However, there are other factors that indicate to robust REIT performance in 2022.
A primary growth driver is the rising U.S. economy, which is raising occupancy rates and rents for real estate in the industrial, housing and shopping-center industries, among others.
“Demand for commercial and residential real estate space will continue to rebound as commercial activity and day-to-day life return to normal,” writes State Street Global Advisors. “When combined with increased rent inflation in 2022, REIT dividend growth and potential valuation appreciation are supported.”
Real estate investment trusts, unlike most other firms, generally gain from inflation. This is because REIT contracts are structured in such a way that they allow for regular rent increases as well as rent increases tied to the consumer price index (CPI). Inflation raises the value of REIT assets, increasing the value of their portfolios.
With that in mind, here are the 12 best real estate investment trusts to buy in 2022. These 12 companies stand out due to generous dividends, inexpensive valuations, and growth prospects, or a mix of these and other factors in most cases.
Why are REITs a poor investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Share Value
Because non-traded REITs aren’t publicly traded, they have less disclosure obligations and are less liquid. As a result, determining the value of the underlying assets, as well as the market value at any one time, is challenging.
Lack of Liquidity
Because they are not traded on a public market, non-traded REITs are likewise illiquid.
One of the major advantages of a REIT is the option to sell your shares, thus if the REIT is not publicly traded, you are foregoing one of the most important benefits of owning one.
Non-traded REITs are frequently unable to be sold without a fee after a minimum of three, five, or even seven years. Early redemption is sometimes possible, but it comes with a cost.
Distributions
Non-traded REITs work by pooling funds to purchase and manage real estate.
Dividends are sometimes distributed from the pooled funds rather than the income earned by the assets. This approach reduces the REIT’s cash flow and lowers the value of its stock.
Fees
Many charge 7-10% of all funds invested, with others charging as much as 15%. Imagine purchasing an investment and being 10% or more in the red before you’ve even purchased a single property.
Furthermore, management fees are the unsung hero of REIT performance. Pay attention to how much the managers are paid and whether they are paid a percentage of gross rents, purchase/sale price, or something else.
Is it a good time to invest in REITs?
REITs provide some of the highest dividend yields in the stock market since they are mandated to return 90 percent of their annual income to shareholders in the form of dividends. As a result, they’re a favorite among investors looking for a consistent income source.
Do REITs distribute dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Are REITs considered passive income?
REITs are an appealing investment option for people looking for a source of passive income or for retirees who want a regular income stream due to their dividend payments.
If you’ve listened to our episode on dividend aristocrats, you might be wondering why, if you desire dividends, you shouldn’t invest in those companies.
How much of my portfolio should be made up of REITs?
According to a new Morningstar Associates study sponsored by Nareit, the ideal portfolio allocation to REITs is between 4% and 13%. Morningstar’s report follows another Nareit-sponsored study by market research firm Chatham Partners, which found that financial advisors understood the need of meaningful REIT allocations from early career to retirement, regardless of the client’s age.
Morningstar’s analysis suggests that including REITs in a portfolio can boost the return for a given degree of risk, as seen in Chart 1. The table below shows five portfolios that target various levels of risk. A moderate portfolio with a 10% standard deviation and a 4.4 percent return, for example, allocates 7.5 percent to REITs, whereas an aggressive portfolio with a 14 percent standard deviation and a 5.8% return is expected to have a 13 percent REIT allocation.
How do REITs get taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When approved, a REIT pays corporation taxes and retains earnings (20 percent maximum tax rate, plus the 3.8 percent surtax) (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.