Understanding Real Estate Investment Trusts
A wealth planning advisor can help you decide whether to invest in individual properties or in Real Estate Investment Trusts. The advantages of individual investments are that you retain control over the investment. The downside of an REIT is that it is fully managed and you have little control over which properties are added to it. While you can invest in a REIT to benefit from a higher level of management, individual real estate investments give you greater control.
Portfolio diversification
Diversification is a key factor in ensuring the longevity of a portfolio. By diversifying your assets, you can minimize losses during bear markets while preserving capital for bull markets. Diversification also reduces volatility. When you have more than one type of investment in your portfolio, you can easily control your risk by adjusting the allocation to each type.
Diversification is important for new investors. When you concentrate a large portion of your portfolio into a single asset, you may not realize that your total returns are limited to that one asset. A diversified portfolio also reduces the risk of experiencing a large loss at once.
Low transaction costs
Real estate investment trusts are perfect for investors who are looking for a reliable and stable investment strategy. However, transaction costs can put a dent in your budget. To avoid this, look for a real estate investment trust with low transaction costs. One of the reasons for this is because of the lack of administrative costs. These fees are typically taken out of the dividend payment.
Transaction costs are a significant factor in real estate investing, and are often overlooked. These costs include the money paid to advertise a property. While many online portals allow sellers to advertise for free, serious sellers may also choose to pay for premium services. Other fees associated with renting property may include credit checks.
Tax treatment of dividends
The tax treatment of dividends in real estate investment trust (REIT) shares is different from that of ordinary income. If the REIT distributes a profit, a portion of the distribution will be taxable, but the rest will be a return of capital. Because of this, the investor receives a lower tax rate than if the investor had retained the dividend. Also, the REIT’s taxable income is reduced by any non-cash deprecation charges.
Dividends are paid from the REIT’s portfolio, which typically consists of commercial properties. Typically, REITs distribute 90% of their taxable income to its shareholders. This translates to a tax burden for investors, who receive a standard 1099 form at tax time. The majority of REIT dividends are ordinary dividends, which are taxed as ordinary income.
Return on investment
Real estate investment trusts (REITs) offer investors the chance to diversify their investments. These companies are often traded on stock exchanges. These funds are not locked into long-term agreements and can move up or down with the economy. REITs also have strong management. They are diversified across many properties and can offer a high return on investment (ROI).
The shares of a REIT are part ownership of real estate properties, and the change in value of those shares reflects the change in value of the individual properties within the REIT. REITs are managed by fund managers, who determine the investment strategy of each REIT. Unlike traditional stocks, REITs earn income by repaying loans and earning interest. Usually, the interest is amortized over a set period of time.