You can’t swing a dead cat on the internet or investment groups without getting someone to tell you that you should invest in this stock or that stock. For myself, still being an investment newbie, I tend for discuss generic investments. One of those that I am drawn to is REITs (Real Estate Investment Trust). I can’t afford to go out and buy individual real estate property so the next best thing are REITs. When I was in the real estate industry I was always told that real estate was a finite commodity. New land was not being created/manufactured. True.
So, why do I like REITs? They invest in most major property types with nearly two thirds of investment being in offices, apartments, shopping centers, regional malls, and industrial facilities. REIT shares are bought and sold on a stock exchange. Buying actual property is more involved and usually needs to have additional parties included in the transaction process. Picking a REIT is less stressful than trying to pick a property to buy. Depending on which REIT you decide to invest in, it can be a low-risk & high return investment. Don’t misunderstand me, you can’t just pick any REIT to invest in, You need to do your due diligence and learn whatever you can about the REIT. Does it’s business focus on buying & managing properties? Or are they focused on originating mortgage loans and servicing them? Maybe their business is trading in mortgage backed securities. I tend to lean toward REITs that own and manage properties but won’t shy away from those that originate mortgage loans. I prefer those that deal in commercial and industrial properties. I own 2 REITs –
$ABR – operates as real estate investment trust, which engages in the provision of loan origination and servicing for multifamily, seniors housing, healthcare, and diverse commercial real estate assets.
$ACRE – engages in originating and investing in commercial real estate loans and related investments.
Tax issues for REIT investors are fairly straightforward; REITs send 1099-DIV to the shareholders which contain a breakdown of the dividend distributions. Because REITs do not pay taxes at the corporate level, this leave more of the profits for distribution as dividends BUT the investors are taxed at their individual tax rate for the ordinary income portion of the dividend.
There are some drawbacks to REITs. The current COVID-19 pandemic can have adverse impact on the ability to collect rents. Also, changes to local property taxes can impact the REIT’s operating costs. I’ve never heard of property taxes ever going down. Another downside is that taxes are due on dividends, and the tax rates are typically higher than most dividends are currently taxed at. This is because a large chunk of a REIT’s dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate.
That said, I still like REITs but my portfolio isn’t too heavy in them. Pertaining to real estate I also own a real estate ETF ($VNQ). This allows me to own shares in many different real estate properties (i.e. $PSA) and REITs (i.e. $AMT) at a price I can afford.