9 Benefits of Investing in Real Estate Investment Trusts
Did you know that there is an investment opportunity which gives income to shareholder dividends? All of this occurs while the value of the investment appreciates. But do you know what it is?
Welcome to the world of Real Estate Investment Trusts (REITs). In this guide, I will share with you nine amazing benefits of adding REITs to your portfolio.
1. Recurring Income
REITs have a distinct advantage over bonds, in that they provide both recurring dividend income and they benefit from capital appreciation. This means their value goes up while you simultaneously get money from them.
The value increases by reinvesting capital gains into property, along with the appreciation of the properties themselves. Most REITs pay a minimum of 90% of taxable income in the form of shareholder dividends each year. This is in stark contrast to equity stocks, where the decision to reinvest or pay dividends is decided by management.
In turn, this means income-oriented investors benefit from high dividend rates. A certain flexibility is also inherent, as you can choose to spend your dividend on what you like or reinvest by purchasing more stocks. The only downside is that the yield comes at a cost of interest rate sensitivity.
2. No Burden of Property Management
Investing in your own property has a lot of benefits. Regular rental incomes and keeping all the profit you make are just a few.
However, anyone who has been a landlord knows the hard work you need to put in. Screening tenants, doing maintenance, and chasing rents are not easy tasks. They are time-consuming and can even cost you.
With REITs, property managers will run your investment. Facilities, rents, tenants, and marketing are all handled by the company, so you don’t have to worry.
3. Long Term Appreciation
When you buy REITs, you won’t get the level of price volatility you get with other equity stocks. However, REITs benefit from gradual, steady rises over a long period of time. There may be times when this rise is less than others, but for a long-term asset it is only going up.
Short-term changes in inflation and interest rates will not impact your investment. As more people inhabit the planet, more desire for real estate will become inherent, keeping prices rising.
Every financial advisor would recommend diversifying your assets. Although REITs technically count as stocks, their focus on real estate gives them a different asset class to equities.
Equity stocks follow the business cycle. They go up and down depending upon the current market and its demands. Real estate does not correlate to this.
Instead, it follows its own cycle. When equity stocks go down, your REIT investments will be less correlated. It is a great way to consolidate your portfolio with a steady and stable income and assets.
5. Easy Access to Commercial Real Estate
For the average person, buying large-scale commercial real estate projects is not feasible. They would not have the capital to go out and buy office buildings, data centers, and whole apartment complexes. That is where real estate investments come in.
REITs allow the average person to invest in these large-scale projects. By investing in commercial assets, it adds another layer of diversification to a portfolio.
6. No Corporate Tax
Strict requirements have to be undertaken for a business to qualify as a REIT. One of the major factors is that 90% of the taxable income has to go to shareholders, making a great recurring investment. Secondly, three-fourths of their assets have to be in real estate.
All of this allows REITs a huge tax advantage in that REITs typically don’t pay any corporate income taxes because their earnings have been passed along as dividend payments. This gives them added benefit for the investor as dividends usually get taxed twice, once at the corporate level and once at the individual level.
7. Protect Against Inflation
When inflation occurs, the price of services and goods rises. During these periods, real estate investments will do well. This is because rental rates increase along with the value of the asset.
All of this gives you great portfolio protection against inflation. Real estate income will increase, stimulating dividend growth and bringing income with it.
8. Retirement Income
With REIT assets, it is just as easy to create a stable retirement income as it is with private property purchases. In fact, REITs have the advantage that when the time comes, you won’t even have to manage them yourself.
Understanding REITs you are going to invest in is essential, as there are a lot of choices: retail, residential, healthcare, office, and mortgage. Each type of REIT works differently. Some types of REITs are riskier than others but may offer greater returns. Thus, you have the choice to diversify even within REITs themselves. Seek advice from a certified professional if you are not sure which is for you.