REITs profit from the mortgages that underpin real estate development or from rental income once the property has been developed. REITs provide stockholders with a stable stream of income as well as long-term gain based on the appreciation of the properties they control.
Can you make good money with REITs?
REITs may be a good long-term investment for those seeking growth and dividend income. In the ten years leading up to Aug. 31, 2021, REITs (short for real estate investment trusts) generated a 10.6% average annual return. This compares favorably to the market’s long-term average return of roughly 10%.
REITs are well-known for paying out large dividends, and the cash income can help investors stay afloat during market downturns. They’re popular, especially among elderly investors, because of their payments. REITs are known for having some of the best yields on the market.
Here are five ways to invest in REITs, as well as their benefits and drawbacks.
How much does a REIT earn?
To put things in perspective, the S&P 500’s average dividend yield is 1.9 percent. In comparison, the average equity REIT (which owns real estate) pays around 5%. The average mortgage REIT (which owns mortgage-backed securities and related assets) pays a yield of roughly 10.6%.
Can you lose money in a REIT?
- 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.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
Do REITs pay 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.
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.
Is REIT a passive income?
Due to their income tax free status and the requirement that they pass on at least 90% of their taxable income to shareholders, Real Estate Investment Trusts (REITs) are among the best passive income vehicles. Real Estate Investment Trusts tend to pay out much greater dividend yields than your ordinary stock due to their significantly lower tax burden paired with the statutory high payout ratio.
Add in the fact that their fundamental business plan often entails passively renting out very large and varied commercial real estate portfolios, and they can be a stable source of income. When compared to investing in a single rental property, REITs offer a considerably more passive, diversified, and liquid real estate investment option.
For passive real estate investors, the following three high-yield REITs provide exceptionally safe and attractive income.
WPC is perhaps the safest high-yield REIT on the market today, with a 23-year dividend increase run that demonstrates its business model’s steadiness and sturdiness. Furthermore, whereas others saw their cash flow per share collapse in 2020 as a result of the COVID-19 lockdowns, WPC maintained its growth in April and May of that year, collecting an outstanding 96 percent of their rents. As a result, the company efficiently covered its dividend last year and is likely to keep its payout ratio at an acceptable 85 percent this year.
WPC is particularly well positioned to benefit as inflation rises in the future, as 62 percent of their leases are CPI-linked. Their BBB credit rating, real estate sector diversification, and geographic diversification across North America and Europe provide them with capital as well as diverse investment possibilities to maximize cap rate/interest rate spreads.
Finally, W.P. Carey has a strong growth trajectory, with $900 million in acquisitions already planned for 2021, with a weighted average lease term of 22 years. As a result, we anticipate W.P. Carey’s dividend per share to grow for many years to come. Despite these advantages, WPC offers a 5.4 percent yield in an environment when long-term interest rates are all below 2%.
MPW offers investors appealing risk-adjusted income and total return potential by combining excellent yield with strong growth momentum in a conservative sector. In the first quarter, normalized funds from operations (FFO) per share increased by a stunning 13.5 percent year over year. The corporation proceeded to raise large capital through at-the-market sales, which it repurposed into acquisitions for hundreds of millions of dollars.
MPW offers an abundance of opportunities for raising and deploying money to maximize cost of capital and cap rate spreads thanks to its presence in the United States, Germany, the United Kingdom, Italy, and Australia. The company also has a proven track record of success, having more than doubled its FFO per share over the last decade while still paying out and increasing its sizable dividend. In the face of COVID-19 challenges, the REIT showed its mettle by increasing the dividend by roughly 4% and expanding FFO per share by 9% last year.
MPW will likely continue to drive transaction flow in the future by leveraging its position as the only pure-play hospital REIT with many years of experience and a vast network of partnerships. The dividend looks quite appealing and safe right now, with a 5.5 percent yield and a 64 percent anticipated payout ratio for 2021, with lots of room to expand in the years ahead.
SPG is the world’s largest retail REIT, with a portfolio of predominantly class A shopping malls. Despite the fact that the road forward has been difficult in recent years due to the increasing growth of e-commerce, numerous high-profile retailer bankruptcies, and COVID-19 lockdowns, SPG continues to create attractive cash flow for investors.
Their success stems from their diverse portfolio of well-located properties, vast network of existing and potential tenants, and strong financial position. Their balance sheet provides them with a lot of cash and access to low-cost debt, which they can use to renovate their properties and keep them profitable. Many of their retail peers, on the other hand, have fallen by the wayside and, in some cases, have even gone bankrupt as a result of overleveraged financial sheets that have been overwhelmed by bankruptcies and redevelopment demands.
While SPG had to cut its dividend in 2020 owing to the COVID-19 lockdowns, it recently increased it by 8% and now provides investors an attractive future yield of 4.3 percent. The dividend looks highly safe and prepared to continue significant growth, with a payout ratio of 57.4 percent forecast in 2021 and robust FFO per share growth momentum into 2022 on the back of the economy’s re-opening.
While the continuous shift toward e-commerce and away from brick-and-mortar retail clouds its future, SPG has the cash, assets, and network to weather the storm and emerge as the premier retail landlord of the twenty-first century. SPG is poised to stay economically viable and a dividend-paying powerhouse for years to come, thanks to mixed-use redevelopments, judicious asset dispositions, and deeper integration between e-commerce and its increasingly omni-channel properties and tenants.
WPC is a highly-diversified, steady-as-she-goes investment that can help you sleep soundly at night by steadily increasing your dividend income stream over time and weathering economic downturns. MPW is a higher-growth, specialty investment that, while not as safe as WPC, should provide investors with a high total return and income. Finally, SPG presents an appealing contrarian value investment opportunity that, if successful, may provide investors with the highest upside in terms of both share price appreciation and dividend growth.
An equal position in all three REITs yields a 5.1 percent average dividend yield, which is amply covered by a diversified stream of cash flows and is likely to expand significantly in the coming years. Furthermore, WPC, MPW, and SPG each offer something unique to investors, making them an excellent location to begin growing your passive income REIT portfolio.
How often do REITs pay out?
is a firm that maintains and operates a diverse portfolio of properties. Apartment buildings, office complexes, commercial properties, hospitals, shopping malls, and hotels are examples of these properties, while particular REITs prefer to specialize in one type of property. REITs are popular because they are required to pay out at least 90% of their earnings in dividends to their shareholders, resulting in yields of 10% or more in some cases.
Do REITs pay income taxes?
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 specified levels of investment in real estate assets and derive certain 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.
Weak Growth
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
