Many investors choose real estate as an investment option. One way to own real estate is through the purchase of Real Estate Investment Trusts (REITs). REITs are publicly traded real estate investment corporations that are purchased on major stock exchanges, such as the NYSE, AMEX and the over-the-counter markets. A company that qualifies as a REIT is permitted to deduct dividends to its shareholders from its corporate taxable income. Of earnings, 90% are distributed to shareholders in the form of dividends.
What Are Some Different Types of REITs?
Equity REITs own and operate income-producing real estate. They own real estate properties and earn income from rents. Investors will purchase Equity REITs as a hedge against inflation.
Mortgage REITs lend money directly to real estate owners and operators, or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Mortgage REITs are similar to bond mutual funds, can also invest in GNMA or other mortgage-backed securities, have higher income than Equity REITs and do not provide inflation protection.
Hybrid REITs invest in equity interests of real estate properties and mortgages on real estate properties.
Private REITs are REITs that are not listed on an exchange or traded over-the-counter.
What Are Some Advantages Of Investing In REITS?
- Personal liability is limited to the amount invested;
- Investors can invest in real estate with relatively small sums of money;
- Because there is professional management of the real estate properties owned by the REIT, the investor is relived of any managerial, record keeping and accounting responsibilities;
- Generally, REITs have higher yields than fixed-income investments, and
- REITs can provide a portfolio with diversification.
What Are Some Disadvantages Of Investing In REITS?
- Investors have no management input, and therefore, have no control over what is purchased or sold;
- Net income may vary greatly from year to year;
- On an annual basis, REITs can only invest up to 10% of their profits back into their core business and tend to grow slower than the average firm;
- Share prices can fall if there is a slowdown in the real estate market, and
- REIT dividends are taxed at regular income rates.
What Do We Recommend?
Henssler Financial does not buy real estate investments for our managed client portfolios; however, there is nothing inherently wrong with owning real estate as an investment. As all of our clients have heard before, we follow our philosophy the Ten Year Rule: Any money you need within 10 years should be invested in fixed-income securities, and any money that you will not need within 10 years should be invested in high-quality, individual common stocks or mutual funds that invest in common stocks. By holding fixed-income securities to cover 10 years worth of liquidity needs, you should not need to sell stocks during a period of lower stock prices.
Instead of buying REITs, we prefer to buy high-quality, individual common stocks, or mutual funds that invest in common stocks, for assets that should be in growth investments. We buy bonds for assets that should be in fixed investments. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].