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Basics to REITS: Are They The Right Investment for You?

December 31, 2019 by Susan Paige

If you want to build an investment portfolio that maximizes your income potential, you owe it to yourself to think about diversifying your investment portfolio. That’s going to require you to gain an understanding about a wide range of investment options. If you are willing to consider investing in something other than stocks and bonds, you might find that REIT investments fit well within your investment portfolio.

It’s reasonable that you would want to learn a bit about REITs before you decide to take the leap of faith. In the discussion below, we will offer up basic information about REIT investing,

What are REITs?

Over time, real estate has consistently proven to be a solid investment. The big issue most lower to middle class investors have is the lack of financial resources to invest in real estate. Or…Do they?

A Real Estate Investment Trust (REIT) is an investment vehicle run by investment professionals with vast experience in the commercial real sector. For all intents and purposes, a REIT operates much the same way as a stock mutual fund with one import distinction, the investment assets include mostly income-producing commercial properties.

In most cases, the underlying commercial property will include things like offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, cell towers, infrastructure and hotels. While some REITs might focus on a specific type of commercial property, they are REITs that prefer to use a more diversified approach to investing.

If you were interested in investing in REITs, you would start by searching for the best REITs to invest in across a wide range of major investment exchanges. Functionally, you would purchase shares in REITs you want the same way you would buy shares in a stock mutual fund.

Your primary source of revenue would be the dividends the REITs pay to all current investors. The dividends represent net income from rental operations.

REIT Regulations

Because of tax benefits afforded to REIT investment companies, REITs are highly regulated by the Internal Revenue Service. While there are several important regulations in place for your protection as an investor, the most important one involves the distribution of dividends.

By Law, REITs are required to distribute at least 90% of its net profits in the form of dividends. While the Trust has a lot of latitude on what it does with the other 10%, a lot of REITs can advertise they return 100% of the net profits to investors. If you were looking for the best REITs to invest in, Trusts that can represent a 100% return might be a good place to start.

Another important regulation requires REITs to hold at least 75% of its liquid assets in real estate properties. That leaves a little bit of room to invest in other aspects of the real estate business.

The Benefits of Investing in a REIT

Any investment option you might consider is going to come with the requisite benefits. Using the stock market as a means of comparison, it might be easier to explain the benefits you might reap from investing in REITs.

First, real estate has always been and likely will always be a solid investment option in America. Over any given 10 year period, real estate delivers solid annual returns on average, usually on par with stock investments. If you can invest in something that appreciates over time while earning an overall return of 75% to 100% over the 10 years, that’s a solid invest. You do need to be aware you are responsible for any tax liabilities created by your dividend revenue.

Another great benefit you might derive from investing in REITs is the promise of steady returns in the form of cash flow. If you can accurately estimate your monthly/annual incoming cash flow, it makes it easier to manage your personal finances.

There’s a big investment world out there waiting for your participation. If you have any desire to put yourself in good financial position for the future, you need to consider all investment options. It’s incumbent on you to set your investment goals and select the options that will fill your needs. If selecting the best REITs to invest in would fit well in your investment portfolio, you now have a general idea of what’s involved

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