While REIT manager salaries are high (sometimes exceeding $250,000 per year), the majority of a fund manager’s pay comes from other sources. To incentivize fund performance, cash bonuses for attaining specified growth targets are often used. Bonus thresholds are typically determined in relation to the performance of an external statistic, such as the S&P 500. Some bonus arrangements are symmetrical, meaning the manager may owe money if the fund underperforms, while others exclusively reward managers who meet their targets and do not punish them for underperformance.
How are REIT managers paid?
To begin with, every year, stockholders are gradually diluted. Due to the increased number of units in issue, the properties in our REIT assets must earn a higher income in order to pay out the same distributions as the previous year. If REIT owners expect increased distributions, the properties in the REITs must perform much better.
To give another example, in FY2017, Soilbuild Business Space REIT issued over 9.9 million additional units to its management. This equates to about 1% of the company’s units in circulation at the start of the year, or $6.0 million.
# 3 Artificially Boosting Of Distributions
Some REIT managers may elect to take a larger portion of their management fees in the form of units. This not only dilutes current shareholders more quickly, but it also permits the REIT to distribute an artificially inflated dividend to investors.
This is achievable because fewer cash management costs are paid in place of units, allowing more cash to be allocated to improved payouts.
# 4 Incentivised To Make Transactions
REIT managers charge an acquisition and divestment fee, as previously stated. This encourages them to conduct business in order to increase their management fees.
Cynics might see this as an opportunity for REIT executives to push for acquisitions and asset recycling (divestment of assets after a few years), even if it isn’t the best financial move for the REIT.
REIT managers are frequently affiliated companies of its sponsors. This may put pressure on REITs to absorb their properties, which may or may not be the greatest move for the REIT, and may even come at exorbitant costs.
REIT managers are also paid a base fee, which is typically based on the entire property value, as well as a performance fee, which is typically based on revenue. This could incentivize REIT management to expand the REIT, whether by purchasing sub-optimal properties or increasing leverage.
REIT Management Is Big Business
As you can see, investors pay a significant fee for the REIT managers’ competence. We can explore investing in some of the listed REIT managers if we believe it is a solid company. When you look at the REITs on this page, you’ll notice that many of them are associated with a well-known listed property developer.
Frasers Property, CapitaLand, Keppel, and OUE are some of the most well-known. SPH, Soilbuild, and City Developments are just a few of the companies that are controlled by a publicly traded company. Several REITs listed here are managed by firms listed in other countries, including Manulife (Manulife US REIT), Lippo Karawaci (First REIT and Lippo Malls Indonesia Trust), Cromwell Property (Cromwell European REIT), and others.
ARA Asset Management, one of Asia’s major REIT managers outside of Japan, was privatized in 2017, which was bad news for investors. Straits Trading Company, which owns close to 21% of the now-private real estate management firm, might provide us with a reduced exposure to ARA Asset Management.
REITs And REIT Managers Have Done A Good Job
While having REIT managers has its drawbacks, we can’t dispute that REITs have performed admirably since they were originally listed in Singapore. The majority of them continue to put in strong performances and attract new business possibilities. Much of this can be ascribed to the REITs’ excellent management.
This does not, however, mean that we should ignore its management and management fee arrangements. We must remain diligent in our monitoring of our investments for changes in fee structures, as well as acquisitions and divestitures.
When things go rough, the competency and structure of REIT management will determine their strength.
Also see: S-REIT Report Card: How Singapore REITs Fared in the First Quarter of 2018
What does a REIT manager do?
The REIT manager determines and implements the REIT’s strategic direction in accordance with its declared investment plan. For example, it is in charge of the REIT’s property acquisition and disposition.
Under exchange for its services, the REIT manager in an externally managed model collects a management fee that includes a base fee and a performance fee. Additional fees, such as acquisition and divestiture fees, may be charged.
A property manager is often appointed by a REIT manager to oversee the REIT’s real estate assets. Renting out the property to create the optimal tenancy mix and rental income, running marketing events or programs to attract shoppers/tenants, and upkeep are all responsibilities of the property manager.
In exchange, the property manager receives a property management fee from the REIT’s assets.
Do you pay fees on a REIT?
A broker can help you buy publicly traded REITs. A publicly traded REIT’s common shares, preferred stock, or debt instrument can all be purchased. Fees for brokerage services will be charged.
Brokers or financial advisers usually sell non-traded REITs. Up-front fees for non-traded REITs are typically hefty. Sales commissions and upfront offering fees typically account for 9 to 10% of the overall investment. The investment’s value is significantly reduced as a result of these charges.
The majority of REITs distribute at least 100% of their taxable income to their shareholders. A REIT’s shareholders are liable for paying taxes on dividends and capital gains received as a result of their investment in the REIT. REIT dividends are considered as ordinary income and do not qualify for the lower tax rates that apply to other types of business dividends. Before investing in REITs, speak with your tax advisor.
Do publicly traded REITs have fees?
The same amount of money is spent on brokerage as it is on buying or selling any other publicly traded stock. Broker-dealer commissions and other up-front costs are often charged at a rate of 10-15% of the investment. Fees and expenses for ongoing management are also common. It’s possible that you’ll be charged a back-end fee.
Can you get rich off REITs?
There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.
However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).
Can you get rich from REITs?
REITs have demonstrated over long periods of time that they are not only a tremendous source of income, but also deliver market-beating gains. REITs, for example, have earned 9.1% annualized returns over the last 20 years, making them the highest performing asset type you could buy (and outperforming the S&P 500 by 26 percent annually).
Which REITs pay the highest dividend?
For income investors, the beauty of REITs is that they are obligated to release 90% of their taxable income to shareholders in the form of dividends each year. REITs often do not pay corporate taxes in exchange.
As a result, several of the 171 dividend-paying REITs we follow have dividend yields of 5% or more.
Bonus: Watch the video below to hear our chat with Brad Thomas on The Sure Investing Podcast about sensible REIT investing.
However, not all high-yielding stocks are a sure bet. To ensure that the high yields are sustainable, investors should carefully examine the fundamentals. This post will go through ten of the highest-yielding REITs on the market with market capitalizations over $1 billion.
While the securities discussed in this article have exceptionally high yields, a high yield on its own does not guarantee a good investment. Dividend security, valuation, management, balance sheet health, and growth are all critical considerations.
We advise investors to take the research below as a guide, but to conduct extensive due diligence before investing in any security, particularly high-yield securities. Many (but not all) high yield securities are at risk of having their dividends cut and/or their business outcomes deteriorate.
High-Yield REIT No. 10: Omega Healthcare Investors (OHI)
Omega Healthcare Investors is one of the most well-known healthcare REITs that focuses on skilled nursing. Senior home complexes account for around 20% of the company’s annual income. The company’s financial, portfolio, and management strength are its three primary selling factors. Omega is the market leader in skilled nursing facilities.
High-Yield REIT No. 9: Apollo Commercial Real Estate Finance (ARI)
In 2009, Apollo Commercial Real Estate Finance, Inc. was established. It’s a debt-oriented real estate investment trust (REIT) that invests in senior mortgages, mezzanine loans, and other commercial real estate-related debt. The underlying real estate properties of Apollo’s investments in the United States and Europe serve as collateral.
Hotels, Office Properties, Urban Pre-development, Residential-for-sale inventory, and Residential-for-sale construction make up Apollo Commercial Real Estate Finance’s multibillion-dollar commercial real estate portfolio. Manhattan, New York, the United Kingdom, and the rest of the United States make up the company’s portfolio.
High-Yield REIT No. 8: PennyMac Mortgage Investment Trust (PMT)
PennyMac Mortgage Investment Trust is a real estate investment trust (REIT) that invests in residential mortgage loans and related assets. PMT
Why are REITs a bad 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.
Who appoints the REIT manager?
The S-underlying REIT’s real estate properties are normally managed by a property manager selected by the REIT manager. It is in charge of renting out the property to achieve the optimal tenancy mix and rental income, as well as organizing marketing events and promotional programs and general care. In exchange, the Property Manager is compensated with a property management fee paid from the S-assets. REIT’s
Do REITs have tax advantages?
Understanding the tax implications of investing in a Real Estate Investment Trust (REIT) is one of the most important factors when adding commercial real estate investments to a well-balanced portfolio approach “When analyzing various options, REITs may be beneficial. Currently, Jamestown is offering Jamestown Invest 1, LLC (the) (the) (the) (the) (the) (the) (the) (the) “Fund”), which is available to accredited and non-accredited investors in the United States. The Fund is established as a REIT with the goal of acquiring and managing a portfolio of real estate investments in urban infill regions that are expected to grow. By the end of this article, you should be able to spot potential REIT tax benefits and better interpret your 1099-DIV form, as well as understand a few IRS rules relevant to REIT investments.
What is a REIT?
The United States Congress first introduced REITs in 1960. Until then, institutional investors were the only ones who could invest in commercial real estate. Most people lacked the financial means or resources to make important and diverse investments in the space. The REIT structure was designed by Congress to address this imbalance. Individual investors were able to pool assets and make major investments in commercial real estate by investing in a REIT.
You may have also heard that REITs are a time-consuming vehicle to manage, and this is correct! It is not, however, without justification. Congress has set various restrictions on the structure and operation of REITs in order to ensure that they meet their legislative goals. The REIT must maintain certain levels of investment in real estate assets and earn particular levels of income from real estate and other passive vehicles in order to be considered a passive real estate investor. There are special shareholder criteria and constraints on the concentration of ownership of REIT shares to ensure that money are pooled by individual investors. REITs that meet these criteria receive preferential tax treatment (discussed in more detail below).
How Are Realized Returns Determined?
Before going into some of the tax advantages of investing in a REIT fund, it’s crucial to understand how commercial real estate trusts create profits for investors. Operating distributions and capital gain distributions are the two components of real estate realized returns.
- Investors receive operating distributions (usually monthly or quarterly) from the cash flow generated by the fund’s underlying real estate investments. This is usually achieved by net rental income or portfolio income from the REIT, such as interest and dividends.
- The capital gain from the sale of real estate within the REIT is the second component of realized returns potential.
How Are Realized Returns Categorized?
A REIT must transfer the bulk of its taxable income to its shareholders in order to maintain its beneficial tax status. REIT distributions are classified into one of the following types. There is a different tax treatment for each category.
- Capital Gains — depending on whether the investment or its underlying property is kept for less than or more than 12 months, capital gains are taxed at a short-term or long-term capital gain rate.
If you recall from our post on How to Invest in Real Estate with a Self-Directed IRA, if you own a REIT in a tax-deferred account like a regular IRA, you only pay taxes on the money when you remove it.
What Are the Potential Tax Benefits of Investing in a REIT?
REITs are eligible for special tax treatment if they meet the IRS’s standards. Eligible REIT structures, unlike other U.S. corporations, are not subject to double taxation. Dividends provided to shareholders help REITs avoid paying corporate income tax. Shareholders may then benefit from preferential US tax rates on REIT dividend distributions.
The Tax Cuts and Jobs Act (TCJA), which was signed into law in 2017, made REIT investing even more tax-efficient. Many taxpayers are eligible for a tax deduction of up to 20% for Qualified Business Income under the TCJA, subject to specified income criteria. Ordinary REIT dividends, interestingly, qualify as Business Income for this reason, and REIT dividends aren’t subject to the income thresholds, thus REIT investors can take advantage of this provision regardless of their income!
The qualified business income deduction is equal to the lesser of (1) 20% of combined qualified business income or (2) 20% of taxable income minus the taxpayer’s net capital gain amount (if any).
The hypothetical after-tax return shown below is based on a $10,000 investment with a 7% yearly dividend yield. We’ll assume a single tax filer who has no capital gains and is in the highest federal marginal tax rate of 37 percent in 2020.
Will I Receive a Schedule K-1 or Form 1099-DIV?
Investors frequently inquire about whether they will receive a 1099 or a K-1 at the start of the year. While a Sponsor’s Investor Relations or Tax Team can provide this information, there are some general standards to be aware of before investing.
A REIT, brokerage, bank, mutual fund, or real estate fund issues Form 1099-DIV to the Internal Revenue Service. Persons who have received dividends or other distributions of $10 or more in money or other property will get Form 1099-DIV. Dividend income is taxed in the state(s) where the person resides, regardless of the location of the property.
Schedule K-1 is an annual tax form issued by the Internal Revenue Service for a partnership investment. Schedule K-1 is used to report each partner’s portion of the partnership’s profit, loss, deductions, and credits. Real estate partnership income may be taxed in the state(s) where the property is located. A Schedule K-1 is identical to a Form 1099 in terms of tax reporting.
Understanding your IRS Form 1099-DIV
If you invest directly in a REIT, you will receive a 1099-DIV from the REIT. You’ll find that numerous boxes on your Form 1099-DIV have already been filled in. Some of the reporting boxes and their ramifications were recently detailed in an article released by TurboTax, a market leader in tax software for preparing US tax returns.
- The percentage of box 1a that is considered qualified dividends is reported in box 1b.
- If you get a capital gain distribution from your investment, you must record it in box 2a.
- If any state or federal taxes were withheld from your dividends, report them in boxes 4 and 14 for federal withholding and state withholding, respectively.
REITs that comply with the law are exempt from paying corporate taxes. Ordinary and capital gain dividend income are taxed at the REIT shareholders’ respective tax rates. Ordinary dividends paid by REITs can be deducted up to 20% before income tax is calculated.
Built-in diversification without the hassle of several state income tax forms is an advantage of investing in a fund with exposure to multiple properties. In comparison to investing in numerous individual properties via partnerships, investors will only pay state taxes on their dividends and capital gains in their individual state(s) of residence.
While many people are aware with publicly traded REITs that offer the tax benefits we’ve discussed, combining some of these benefits with non-correlative private real estate may be a viable option for investors looking for a more diversified portfolio. Alternative investments have been a part of many high-net-worth individuals’ and institutions’ portfolios for decades, but they are still not a portfolio staple for many people.
