REITs are already tax-advantaged investments because their profits are shielded from corporate income taxes. Because REITs are considered pass-through corporations, they must disperse the majority of their profits to shareholders.
The majority of your REIT dividends will be classified as regular income if you hold them in a conventional (taxable) brokerage account. However, it’s likely that some of your REIT dividends will fall under the IRS’s definition of qualified dividends, and that some of them would be treated as a non-taxable return of capital.
Ordinary income REIT dividends meet the requirements for the new Qualified Business Income deduction. This permits you to deduct up to 20% of your REIT payouts from your taxable income.
Holding REITs in tax-advantaged retirement accounts, such as regular or Roth IRAs, SIMPLE IRAs, SEP-IRAs, or other tax-deferred or after-tax retirement accounts, is the greatest option to avoid paying taxes on them.
You can save hundreds or thousands of dollars on your investment taxes if you follow these guidelines.
Should I hold REITs in my portfolio?
Despite the fact that REITs trade on major stock exchanges, many financial planners (including myself) consider real estate to be a separate asset class from stocks and bonds. As a general guideline, allocating 5 percent to 10% of your assets to REITs is an excellent approach to diversify your exposure and/or improve your portfolio’s dividend income.
Of course, this is just a starting point; in some cases, the optimum answer for you may be substantially higher. REITs, for example, account for around 30% of my stock portfolio. It’s wise to invest in what you know, as many prominent investors have said. Real estate is the sector in which I am most comfortable appraising, thus it accounts for the majority of my portfolio’s allocation.
For income-seeking investors, REITs could be a solid choice for more than 10% of a stock portfolio. Let’s face it: today’s bond and other fixed-income investment yields aren’t exactly stellar. However, there are a slew of REITs with dividend yields in the 3% to 4% range that are completely sustainable. As a result, a retiree or other income-oriented investor might benefit from a bigger REIT investment.
Can you hold REITs in an IRA?
The response is frequently “yes.” According to financial journalist Reuben Gregg Brewer, “if you possess REITs in an IRA, you won’t have to pay taxes on that income until you pull money out of the IRA.”
How long should you hold onto REITs?
REITs invest in income-producing assets such as commercial properties. This income is subsequently given to investors as dividends on a monthly basis. REITs are obligated by law to distribute 90% of their earnings to shareholders in the form of dividends.
REITs also come with fees.
You’ll typically pay a management fee for other forms of investments, such as index funds and ETFs, and the same is true for REITs.
“Yes, all REITs have management fees attached to them.” Consider it like a mutual fund; management costs vary depending on the fund,” Jhangiani explained.
You can always double-check with the broker or advisor you’re working with if you’re unsure how much you’ll spend in fees for a specific REIT.
Make sure you identify whether you’re investing in a publicly traded REIT or a non-traded REIT
If you’re thinking about investing in a REIT, you’ll want to be sure you’re investing in the appropriate one. You don’t want to buy in a non-traded REIT when you meant to participate in a publicly traded REIT, and vice versa.
According to Jhangiani, publicly traded REITs will have ticker symbols (akin to the ticker symbols used by equities), but non-traded REITs would not. This is one basic method of locating them. You can also use Nareit to look via a REIT directory. You can narrow down the list to only look at publicly traded REITs, non-traded REITs, or both, which is useful if you want to perform your own research before working with a broker or advisor to invest in non-traded REITs or before investing in a publicly traded REIT on your own.
REITs are not without risk: Factors like location and lease terms can influence the risk level of a particular non-traded REIT.
REITs, like any other sort of investment, come with inherent risk. Because their share price fluctuates with the stock market, publicly traded REITs, for example, might face drops.
“When Covid happened, the market dropped 30-40%,” Jhangiani stated. “Even though the value of the real estate in its portfolio isn’t lower, when the market falls, the price of publicly traded REITs falls with it. So if you have no choice but to sell, you have no choice but to sell at the bottom.”
Other factors, such as a tenant’s lease for their commercial building or whether you’re investing in a finished facility or one that’s still in development, might influence risk with non-traded REITs.
“In general, the shorter the lease period, the bigger the risk,” Jhangiani explained, “since you never know how long it would take to locate a new renter once one lease expires.” “Another factor that affects risk is if you’re betting on a property that’s currently being built. The risk is larger because you won’t be able to earn money from that property for the first few years because it’s still being built.”
REITs should generally be considered long-term investments
This is especially true if you want to invest in non-traded REITs, because you won’t be able to access your money until the REIT either registers its shares on a public exchange or liquidates its assets. It can take up to ten years for this to happen in most circumstances.
Jhangiani also advises holding publicly traded REITs that vary with the stock market for at least three years. However, as with any stock investment, the longer you plan to keep them, the more time you’ll have to recover from any significant market drops.
“Both public and non-public REIT investments should be considered long-term, and that could mean different things to different people,” Jhangiani explained. “In general, investors who typically invest in REITs look to hold them for at least three years, and some of them could hold them for ten years or more.”
You should do some digging on a REIT’s performance to figure out which ones are a potentially strong investment
When choosing a dependable REIT, you should consider the management team’s track record. This may reveal information about their previous achievements. It’s also a good idea to inquire about the team’s compensation. A team that is compensated based on performance, for example, will expend a lot of effort to ensure that its investments (and, by extension, your investments) are performing well.
“Investors should think about the costs, strategy, underwriting process of the manager, leverage on the properties, dividend yield, and any other risks associated with that particular REIT,” Jhangiani said.
You can look up these details on the REIT’s website or talk to a broker or financial advisor about having this information gathered for you.
You can use some retirement accounts to invest in REITs
Alternative investment choices, including REITs, are becoming more accessible through retirement accounts, according to Jhangiani. Traditional and Roth IRAs, as well as other retirement accounts, can be used to invest in publicly traded REITs.
When it comes to 401(k) plans, though, your options will be limited by your employer’s plan. Many companies will only let you invest in a target date fund through your 401(k) plan (k). However, you can always check with your company’s benefits department to see whether you have the opportunity to invest in REITs through your 401(k) plan.
Gains on REIT investments are taxed
Dividends earned from REIT investments are taxed. According to Nareit, REIT dividends are taxed at the regular income tax rate, which can be as high as 37 percent. However, you can deduct up to 20% of your dividend income for the year when you file your taxes.
REITs are fairly accessible to those who want to invest in them
Investing in publicly traded REITs can be done with any brokerage account, such as Fidelity or TD Ameritrade. Non-traded REITs, on the other hand, are normally only available through a personal broker or financial advisor, however applications like Fundrise, YieldStreet, and Elevate Money allow you to invest in non-traded REITs on your own through their platforms.
Elevate Money, for example, invests in car washes, petrol stations, dollar and convenience stores, and fast service restaurants, whereas YieldStreet’s portfolios are primarily comprised of commercial, residential, and multi-purpose buildings. In addition, certain robo-advisor platforms, such as SoFi Invest, incorporate REITs into their automated investing strategies for their subscribers.
Consider your goals when deciding which REIT to invest in
You should always evaluate your financial goals and how your next financial move will help you get closer to that goal, just as you do with any other financial step you decide to take. Investors who are easily discouraged by volatility may be hesitant to invest in a publicly traded REIT that follows the stock market’s highs and lows. At the same time, an investor who desires immediate access to their money should avoid investing in something that keeps their money locked up for long periods of time.
“Non-traded REITs can theoretically provide you greater yields and may even be a potential inflation hedge,” Jhangiani explained. Publicly traded REITs provide more liquidity, but non-traded REITs can potentially give you higher yields and may even be a potential inflation hedge. “So it depends on the goals and needs of the investor – do they want liquidity or a low level of volatility? Usually, that is the deciding factor.”
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Can you lose all your money in 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.
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.
Where do REITs go on tax return?
Dividend payments are a frequent technique to make these transfers. Dividends can be fully PID, entirely non-PID, or a combination of the two; on a dividend-by-dividend basis, the Board will determine the most appropriate make-up. Furthermore, the Scrip Dividend Alternative’s PID/non-PID make-up may differ from that of the underlying cash dividend.
PID & non-PID dividend payments
Shareholders should be aware that PID and non-PID dividends have different tax treatment. In the hands of tax-paying shareholders, PIDs are taxable as property letting income, but they are taxed independently from any other property letting revenue they may get.
Forms for requesting withholding tax exemption on PID dividend distributions are available:
- The PID from a UK REIT is included on the tax return as Other Income for UK residents who receive tax returns.
- Dividends received from non-REIT UK companies will be regarded in the same way as dividends received from REIT UK companies. From April 6, 2016, the non-PID element of dividends received by UK resident shareholders liable to UK income tax will be entitled to the tax-free Dividend Allowance (£5,000 for 2016/17) if they are subject to UK income tax. It should be noted that the PID component of dividends is not covered by this allowance.
- Any normal dividend paid by the UK REIT is included on the tax return as a dividend from a UK firm for UK residents who receive tax returns. Your dividend voucher will list your firm shares, the dividend rate, the tax credit (for 2016 and preceding years), and the dividend payable. Add the tax credit to the total dividend payments in box 4 on page 3 (box references are for the 2018 return).
Sale of shares by UK and non-UK resident shareholders
Gains realized by non-UK residents must be disclosed to HM Revenue & Customs within 30 days of the transaction.
Gains realized by UK citizens should be recorded as usual on the tax return.
Where do I report REIT income on tax return?
Each year, if you own REIT shares, you should receive a copy of IRS Form 1099-DIV. This shows how much money you got in dividends and what kind of dividends you got:
The 1099-DIV instructions explain how to report each type of payment on your tax return.
Are REITs good for retirement income?
Nareit commissioned Wilshire Funds Management to investigate the function of REITs in Target Date Funds (TDFs). REITs, according to Wilshire, play a crucial role in boosting investment returns and lowering risk in these popular investment vehicles.
Individuals can use TDFs to make portfolio planning easier. Over the next few decades, it is predicted that the bulk of new 401(k) and IRA assets will be put in TDFs, and millions of Americans’ retirement security will be dependent on their investment performance.
REITs Important Across the Target Date Fund Lifecycle
For workers with various retirement horizons, the figure below highlights the recommended proportion of US REITs in a retirement portfolio.
- REIT allocations range from 15.3 percent of a young worker’s portfolio with 40 years till retirement to over 10% for an investor nearing retirement age.
- The REIT allocation drops with other equities throughout retirement, but it still exceeds 6% for an investor nearly ten years later.
REIT Attributes: High and Stable Income, Long-term Capital Appreciation, Diversification and Inflation Protection
Because they provide income, capital appreciation, diversification, and inflation protection, REITs are a significant aspect of retirement portfolios.
Adding assets with low correlations to the current assets in the portfolio can reduce portfolio volatility. The long-term correlations of equity REITs with the other major asset classes studied range from 0.19 to 0.65, indicating that adding REITs to an investing portfolio can provide diversification benefits.
Table 1 compares asset allocations for an optimal portfolio in the glide path for the 15-year-to-retirement cohort, excluding and incorporating REITs in the set of possible investments.
U.S. TIPS, U.S. High Yield Bonds, and U.S. Small Cap Equities have much lower or nil allocations in the REIT-based portfolio. REITs are a more efficient asset class for combining the investing features of high and consistent income, long-term capital appreciation, and inflation protection since they take “shelf space” in the optimal allocation from these assets.
REITS Improve Retirement Readiness
Incorporating REITs into the TDF portfolio boosts returns while lowering risk. Over the 44-year period 1975 to 2019, Table 2 compares risk and return for optimal portfolios in the middle of the glide path, excluding and incorporating REITs. A TDF portfolio that includes REITs has a higher return and lower risk than one that does not. With an average portfolio risk of 9.33 percent, the TDF REIT portfolio returned 10.49 percent annually. Without REITs, the return would be 10.02 percent and the annualized portfolio risk would be 9.50 percent. The TDF portfolio utilizing Surplus Optimization would have had a portfolio value at the end of 2019 that was 20.4 percent greater than a portfolio without REITs during the 44-year investing period.
*The Wilshire study detailed on this page is an updated version of a 2012 Wilshire study.
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.
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.
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
