“How did REITs do during the last time of rising interest rates?” asks Matt Frankel. When all else is equal, REITs are extremely sensitive to interest rates. The majority of dividend stocks are. When I say interest rates, I’m usually talking to treasury rates, such as the 10-year Treasury yield, which is an excellent benchmark to know.
In general, as that rate rises, REITs fall in value. The reason for this is that income investors expect a risk premium over what they can get from a risk-free investment like a treasury bond. For example, if a 10-year Treasury yields 2%, a REIT might yield 5%. If the 10-year Treasury yield jumps a percentage to 3%, investors will expect a similar percentage jump in their REIT dividend yield. Because the relationship between dividend yield and stock price is inverse, rising rates lead to higher dividend yields, which in turn leads to lower stock prices. That is, assuming everything else is equal. Everything isn’t always equal. Interest rates fell during the COVID epidemic, which would have been beneficial to REITs in a normal environment, but real estate was one of the hardest-hit sectors when the pandemic began. There are many other forces at work, and they aren’t all related to interest rates. Interest rates rising are negative for REITs in a regular, boring stock market, whereas interest rates falling are favorable for REITs.
To respond to Ryan’s question more directly, during the most recent period of rising interest rates, which was roughly from 2018 to 2019, REITs underperformed severely, and real estate was one of the worst-performing sectors in the market at that time. It still rose, but tech companies outperformed it, and it underperformed the S&P 500 by a small margin.
If you’re a REIT investor, keep in mind that it tends to even out over time. They do worse when rates rise and better when rates decrease, and because these are long-term investments, it tends to even out over time.
Is 2021 a good time to buy REITs?
So far in 2021, real estate investment trusts (REITs) have performed admirably. The real estate sector’s almost 30% total return (price plus dividends) until the end of August handily outperformed the S&P 500 Index’s 21%+ return.
Even better, several variables indicate that REITs will continue to outperform other assets in the remaining months of 2021.
The first is a lack of high-yielding crops. Both the 10-year Treasury note and the S&P 500 are currently yielding a pitiful 1.3 percent. REITs, on the other hand, pay out more than double that, with an average yield of 2.7 percent, making real estate equities one of the best-paying sectors in the market.
Are REITs a good buy now?
- No corporation tax: A company must meet certain criteria in order to be classed as a REIT. It must, for example, invest at least three-quarters of its assets in real estate and pay shareholders at least 90% of its taxable income. If a REIT fits these criteria, it receives a significant tax benefit because it pays no corporate tax, regardless of how profitable it is. Profits from most dividend stocks are effectively taxed twice: once at the corporate level and then again at the individual level when dividends are paid.
- High dividend yields: REITs offer above-average dividend yields because they must pay at least 90% of taxable revenue to shareholders. It could, for example, offer a secure dividend yield of 5% or more, but the typical S&P 500 company yields less than 2%. If you need income or wish to reinvest your dividends and compound your gains over time, a REIT can be a good solution.
- Total return potential: As the value of its underlying assets rises, a REIT’s total return potential rises as well. Real estate values rise over time, and a REIT can grow its worth by employing a variety of tactics. It might either build properties from the ground up or sell valued assets and reinvest the proceeds. A REIT can be a good total return investment when this is combined with substantial dividends.
- REITs were designed to provide average investors with access to commercial real estate assets that would otherwise be out of reach. Most people can’t afford to buy an office tower outright, but there are REITs that can.
- Diversification of your financial portfolio: Most experts think that diversifying your investment portfolio is a smart idea. Despite the fact that REITs are technically stocks, real estate is a distinct asset class from stocks. During difficult economic times, REITs tend to keep their value better than equities, and they’re a terrific way to add stable, predictable income. These are only two examples of how an all-stock portfolio’s inherent risk can be mitigated.
- Real estate transactions might take a long time to buy and sell, but REITs are a very liquid investment. A REIT can be bought or sold at any time. Because traded REITs can be purchased and sold like stocks, it’s simple to receive money when you need it.
- Direct ownership and management of a property is a business that demands time and effort. REIT shareholders do not own the properties or mortgages in its portfolio, thus they do not have to deal with property maintenance or development, landlord services, or rent collection as a property owner or management would.
How are REITs doing in 2021?
So far in 2021, the REIT sector has posted increases in every month, including a +1.77 percent average total return in May. In May, 58.24% of REIT securities had a positive total return. In May, hotels and student housing REITs outperformed all other property types, while corrections and health care REITs saw the biggest drops.
What is the 2% rule in real estate?
Purchasing a property and renting it out can help you pay off your mortgage while also potentially generating additional cash. Renting out your property can also provide you with passive income, allowing you to focus on other things while still earning money. Buying and renting properties is a simple method to begin investing in real estate. What do you need to know?
In real estate, the two percent rule relates to what percentage of the total cost of your residence you should ask for in rent. To put it another way, for a $300,000 property, you should be asking for at least $6,000 a month to make it worthwhile.
However, in metro real estate markets, the 2 percent guideline is frequently impossible to achieve. However, the average rental cost in a place like Philadelphia is $1,660, while the average home is $203,000. This can be a decent rule of thumb for determining what you would need to charge in order to be cash-flow positive relatively soon. In other words, charging $4,000 for an average home rental will be out of line with the local rental market.
Capital gains tax on real estate investment property will apply if you are not intending to live in your investment property (If you live there for at least 2 years, you can minimize – or even eliminate – your capital gains tax responsibility).
If you own property for less than a year, you’ll pay the same amount in taxes as if you were earning regular income. It’s considered a long-term capital gain if you’ve owned the property for at least a year. These profits are taxed at a reduced rate of 0%, 15%, or 20%, depending on your income and filing status.
Do REITs do well in a recession?
It’s crucial to remember that nothing can fully protect you against a recession. Any venture has weaknesses and hazards, and each economic downturn presents new obstacles.
While no recession is the same as the last, there are some real estate sectors that are more robust during a downturn. Real estate investments that meet people’s basic requirements, such as housing and agriculture, or that provide important services for economic activity, such as data processing, wireless communications, industrial processing and storage, or medical facilities, are more likely to weather the storm.
Investors can own and manage properties in any of the asset classes, but many prefer to invest in real estate investment trusts (REITs) (REIT). REITs can be a more affordable and accessible method for investors to enter into real estate while also obtaining access to institutional-quality investments in a diversified portfolio.
Data centers
We live in a data-driven technology era. Almost everything we do now requires data storage or processing, and the demand for data centers will only grow in the next decades as more technological or data-driven gadgets are released. During recessions, more people stay at home to watch TV, use their computers or smartphones, or, in the case of the recent coronavirus outbreak, work from home, increasing the need on data centers. According to the National Association of Real Estate Investment Trusts, there are currently five data center REITs to select from, with all five up 33.73 percent year to date (NAREIT).
Self-storage
Self-storage is widely regarded as a recession-proof asset type. As budgets tighten, some families downsize, relocating to other places to better their quality of life or pursue a new work opportunity, or downsizing by moving in with each other to save money. This indicates that there is a higher need for storage.
The COVID-19 pandemic, on the other hand, has had an unforeseen influence on the storage industry. While occupancy has remained high, eviction moratoriums and increasing cleaning and safety costs have resulted in lower revenues. According to NAREIT, self-storage REITs are down 3.51 percent year to date. However, this industry is expected to recover swiftly, particularly for companies like Public Storage (NYSE: PSA), the largest publicly traded self-storage REIT, which has a strong credit rating and a diverse portfolio.
Warehouse and distribution
E-commerce has altered the way our economy works. Demand for quality warehousing and distribution centers has soared as more consumers purchase from home than ever before. Oversupply of industrial space, particularly warehouse and distribution space, is a risk, given that this sector has been steadily growing for the past decade; however, as a result of COVID-19, it has already proven to be the most resilient asset class of all commercial real estate, making it an excellent choice for a recession-resistant investment. Prologis (NYSE: PLD), one of the major warehousing and logistics REITS, and Americold Realty Trust (NYSE: COLD), a REIT that specializes in cold storage facilities, have both proven to be quite durable in the present economic situation, with plenty of space for expansion.
Residential housing
People will always require housing. Residential housing, which can range from single-family homes to high-rise flats or retirement communities, fulfills a basic need that is necessary even in difficult economic times. During economic downturns, rents may stagnate and evictions or foreclosures may increase, but residential rentals are a relatively reliable and constant source of income. Despite the COVID-19 challenges, American Homes 4 Rent (NYSE: AMH), which specializes in single-family rental housing, and Equity Residential (NYSE: EQR), which specializes in urban high-rises in high-density areas, are two of the largest players in residential housing, both of which have maintained high occupancy and collection rates.
Agriculture
Aside from housing, agriculture and food production are two additional critical services on which our country and the rest of the world rely. Our existing food system is primarily reliant on industrial agriculture, but more and more autonomous and regenerative agricultural projects are springing up, allowing for more crop diversification, increased productivity, and reduced economic and environmental risk.
Wireless communication
Wireless communication has grown into a giant sector, with American Tower (NYSE: AMT) and Crown Castle International (NYSE: CCI) being two of the world’s largest REITs. Cell tower REITs that provide telecommunication services are an important part of our world today, and while growth prospects can be difficult to come by, very good track records and rising demand make this a terrific real estate investment that will weather any economic downturn.
Medical facilities
Medical facilities, senior housing, hospitals, urgent care clinics, and surgery centers all provide a vital service that will always be in demand, even during economic downturns.
Retail centers
Before you abandon ship when you see this category, let me state unequivocally that retail is not dead, at least not in all forms. Grocery stores and other retail outlets that provide critical services and products will continue to be in demand, as they did during the last pandemic. The issue here is for retail REITs to invest in the vital service sector with such focus that other sectors such as tourism, restaurants, or general shopping and goods do not put the company or investment at risk.
What are the safest REITs?
These three REITs are unlikely to appeal to investors with a value inclination. When things are uncertain, though, it is generally wise to stick with the biggest and most powerful names. Within the REIT industry, Realty Income, AvalonBay, and Prologis all fall more generally into that category, as well as within their specific property specialties.
These REITs are likely to have the capital access they need to outperform at the company level in both good and bad times. This capacity should help them expand their leadership positions and back consistent profits over time. That’s the kind of investment that will allow you to sleep comfortably at night, which is probably a cost worth paying for conservative sorts.
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
Are REITs taxed differently?
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 allowed, a REIT pays corporation taxes and keeps the profits (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.
Will REITs Recover in 2021?
In 2021, commercial real estate and REITs are expected to begin to recover, with the speed of recovery being determined by the availability and efficacy of a vaccine.
What REIT does Warren Buffett Own?
Warren Buffett does not put much money into real estate, but he has invested in two REITs. Seritage Growth Properties and STORE Capital are the two REITs in question.
