Today, you can invest in commercial real estate through real estate investment trusts without purchasing and managing the properties.
Alexander Studhalter, an experienced businessman , has many suggestions on this subject. In this article, Alexander Studhalter will explain in detail about REITs investment, and how to approach it.
Firstly, what is a REIT?
In other words, a REIT is a real estate investment trust. And it is becoming increasingly popular with investors seeking to diversify their portfolios beyond publicly traded stocks or mutual funds.
REITs own (and often operate) income-producing properties, such as apartments, warehouses, self-storage units, malls, and hotels.
REITs are known for paying large and growing dividends, which is why they are so appealing. Still, that potential for growth carries risks that vary depending on the type of REIT.
What is Alexander Studhalter’s process of setting up a REIT?
Congress created real estate investment trusts in 1960, so individual investors could own equity stakes in large-scale real estate companies. Investors could easily buy, and trade diversified real estate portfolios with this move.
REITs are required to meet specific standards set by the IRS, including that they:
- Dividends of 90% of taxable income are paid to shareholders every year. Therefore, interest is high in REITs because of this.
- At least 75% of total assets should be invested in real estate or cash.
- To receive at least 75% of gross income from real estates, such as rents, mortgage interest, or real estate sales.
- After the first year of existence, the company must have a minimum of 100 shareholders.
- In the last half of the taxable year, more than five individuals may hold no more than 50% of shares.
Due to these rules, REITs do not have to pay corporate tax, allowing them to finance real estate more cheaply. They can earn more profit to disburse to investors — than non-REIT companies. This means that REITs can grow more prominent over time and pay more significant dividends.
Different types of REITs, according to Alexander Studhalter
There are three broad categories of REITs based on their investment holdings: equity, mortgage, and hybrid REITs. A REIT can be classified as publicly traded, public non-traded, or private, based on how it can be purchased.
You should know what’s under the hood before you invest in a REIT since each type has different characteristics and risks.
Investment holdings of REITs
Like landlords, equity REITs handle all the management tasks that come with owning a property. The company owns the underlying real estate, collects rent checks, maintains it, and reinvests it.
In contrast to equity REITs, mortgage REITs (also called mREITs) do not own the underlying assets. Instead, they own debt securities backed by real estate.
REITs may purchase mortgages from lenders and collect payments over time, generating interest income. In this case, the property is owned and operated by someone else – the family.
Mortgage REITs are usually significantly riskier than their equity REIT cousins and tend to pay higher dividends.
These are a combination of equity REITs and mortgage REITs. Their portfolios include real estate properties and commercial property mortgages.
Alexander Studhalter says that there are pros and cons to REITs
As REITs must distribute 90% of their annual income to shareholders, they consistently offer some of the highest dividend yields. Therefore, they are popular with investors looking for a steady income stream. The most reliable REITs have a record of paying large and growing dividends for decades.
REITs can outperform equity indices, which makes them an appealing option for portfolio diversification.
It is far easier to buy and sell publicly traded REITs than to purchase, manage, and sell commercial properties.
Due to their higher dividends, REITs tend to be less volatile than traditional stocks. In contrast to other asset classes, REITs can provide a hedge against stomach-churning ups and downs. Volatility, however, is a fact of life for all investments.
Illiquid (especially non-traded and private REITs):
Trading publicly traded REITs is more accessible than buying and selling properties, while non-traded and private REITs can be more difficult. For potential gains, these REITs must be held for years.
REITs also have a lot of debt due to their legal status. In general, they are among the most indebted companies. Since REITs typically generate regular cash flow from long-term contracts, investors have become comfortable with this situation. For example, leases see that money will be coming in – so that they can comfortably pay their debts and still pay dividends.
Low growth and capital appreciation:
REITs pay most of their profits as dividends, so they must issue new shares and bonds to grow. During a financial crisis or recession, investors may not always be willing to buy them. Therefore, REITs may not be able to purchase real estate exactly when they want to. The REIT can continue to grow when investors once again buy stocks and bonds in the REIT.
Investors who hold REIT investments in tax-advantaged accounts aren’t taxed on dividends, even though REIT companies pay no taxes.
Non-traded REITs can be expensive:
The cost for an initial investment in a non-traded REIT maybe $25,000 or more and may be limited to accredited investors. Non-traded REITs also may have higher fees than publicly traded REITs.
In conclusion – Get started investing in REITs!
Starting is as easy as opening a brokerage account, which usually takes less than five minutes. Publicly traded REITs can then be bought and sold like any other stock.
Consider holding REIT dividends in a tax-advantaged account such as an IRA to defer paying taxes on the distributions.
Buying an ETF or mutual fund can make sense when you don’t want to trade individual REIT stocks. That mutual fund vets and invests in a range of REITs, and you get immediate diversification and lower risk.
Many brokerages offer these funds and investing in them requires less legwork than researching individual REITs for investment.
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