REIT or Real Estate Investment Trust is a hands-off opportunity to get property. You can decide if it is a good investment idea for retirement by understanding how it works
These are companies in charge of income-generating assets. They either own or fund it, and anyone can earn part of these incomes by buying REIT. Shareholders get their profits via dividends
There are many types of REITs, all under two basic categories: mortgage REITs or equity REITs.
Equity REITs: This is the dominant type of REITs as it comprises gigantic commercial buildings, warehouses, apartment buildings, retail storefronts, etc. Specialties REIT does own hotels and properties in the hospitality industry. While some might focus on the medical industry, others prioritize long-term care facilities.
Many large, multi-floor office buildings used as headquarters of corporations are an example of commercial real estate owned by REITs. Many companies prefer not to own their store location but acquire it by lease.
Mortgage REITs, on the other hand, do not own property. The finance and take an interest in mortgage securities that have to do with properties. While their specialties might be in the residential and commercial markets, it might also be in both markets.
Some advantages come with investing in REIT.
Access to a various portfolio of properties
With real estate, you get to diversify the type of assets in your retirement portfolio. You can do this without managing the property yourself. Also, REITs is not affected by instability in the price of bond or stocks. For instance, when a market is falling, REITs will not decrease the way stocks are dropping.
You Qualify for Income on the Real Estate
Based on the rule guiding REIT, shareholders must get at least 90% of its taxable income. This can translate into lots of revenue for shareholders. Over the years, REITs have shown several promising features compared to other income-based securities.
In a Non-taxable account, you are spared of Current taxes
With a REIT in a retirement account such as IRA or traditional 401(k), the income in the year will not be taxed. For distributions you took later from a tax-deferred account, you will have to pay taxes. If you have the REIT in a Roth account, you will be spared of taxes on the dividend in that year or subsequent years.
You Can Hold REITs for a While
Bonds and stocks are subjected to the business cycle of six years. REITs, on the other hand, are like real estate that lasts for a decade and, in many cases, longer. As a result, if you are looking for an investment that will last long, consider REIT
In the same way, there is a couple of Downsides to REITs
Pretty Risky, compared to Stocks
Sadly, REITs are volatile compared to U.S. stocks. Also, REIT could drop in value if it is in an area experiencing a real estate downturn. This can even crash the overall value of the portfolio invested in REIT. As a result, it is critical to know the underlying assets of a REIT before investment. Besides, it is recommended that REIT make no more than 5% of a diversified retirement portfolio. It is not a good idea to have REIT as one investment that makes up all your portfolio.
In other words, the payout could completely stop. When the economy is taking a severe hit, REIT might not give out adequate rental income. This could reduce or eliminate the dividend payout.
You can buy REIT just like you buy stocks or funds. In other words, you will have to purchase REITs as mutual funds, stocks, or ETF in a retirement account in which you want to keep them.
You can easily get details (share price and dividend yield) on publicly-traded REITs via an online financial site such as Yahoo Finance.
Privately held REITs, on the other hand, do not trade on an exchange. While they are still registered securities, they have no ticker symbol. The shares are sold by the real estate company or via a sales representative. Selling them can also be a challenge as there is no public market for such REITs.
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