Accounting & Finance
Facts You Should Know About REITs
Did you know that according to Forbes, the real estate industry ranks third after Finance and Investment, and Investment and Retail in making wealth worldwide?
Indeed, the popularity of this industry is no mistake, and you may have come across the term Real Estate Investment Trusts (REITs.)
Investors enjoy payouts that grow steadily, making it an attractive income generating opportunity. But you need not just jump into placing your hard earned money in REITs; there are risks involved which can lead to losses. You need first to familiarize yourself with REITs and all the facts involved.
Are you wondering what they could be and the meaning of REITs? No need to fret; continue reading for insight.
People wonder what are real estate investment trusts? It is a taxable means established in 1960 in America to help fund the skyrocketing demand for various real estate types. Written as REITs in short form, they are usually passed-through equities.
If a company pays investors a minimum of 90% of its taxable earnings as unqualified dividends, it does not pay federal income tax. As a result, equities that yield highly get formed where REIT stocks generate 5% excess in profit.
Thanks to its high payout ratio, cash flow retained is less. The management develops its cash-producing property portfolio by predicating this business model on the constant capital arise from equity markets and the debt. As a result, dividends get to grow, and price appreciation gets shared over time.
Surprising Facts about REITs That You Should Know
It is a no secret; investing in REITs is rewarding, but you need to learn the ropes first and get to understand the various aspects that will assist you in reaping the benefits derived from this industry. Investing with no prior knowledge comes with a cost that may leave your bank accounts and wallet empty.
Would you like that? If not, check out some facts that you should know about REITs herein below:
1. Differ From Purchasing a House
Many people think that REITs involves buying a house, just like the traditional home ownership, but they are wrong! The fact that they fall under the real estate does not mean they include purchasing homes. It is a special fund that one invests in any company that builds, manages, or owns a commercial real estate and in return enjoy dividends.
In the United States of America, approximately 40,000 commercial properties get owned by REITs. You get able to partly possess real estate properties like hospitals, shopping centers, factories, or housing developments. If managed properly, you get to make a lot of money.
The fact that REITs is a steady investment shouldn’t confuse you. Sometimes this industry gets volatile and turns against investors. What’s sad is the fact that sometimes it’s difficult to predict the real estate industry, making it a risk or investment made out of assumption.
3. Steady Positive Performance
Though this industry can get volatile, the probability of doing so is slim based on its history. Since 1975, REITs annual returns increased by 16.7% every year until 2006. Isn’t it a long-term positive performance? As a result, REITs popularity heightened in 2007. The trend maintained with 14.4% yearly growth up to 2014.
4. The danger in Short-term Performance
You wouldn’t want to experience the negative side of REITs’ short-term performance; it can get heartbreaking. You can go crazy due to losses incurred during such time. For example, in 2007, The Dow Jones Wilshire REIT Index value was lost by half in two years.
5. Major Reasons to Investing in REITs
It is true that your portfolio’s return improves when you own REITs, but it isn’t the main reason why one invests in REITs.
The primary reasons include:
- To increase diversification
- To reduce volatility
- To generate income
Unlike other major classes of equity asset, REITs’ performance is different. Since 1975, returns gotten from REITs differed throughout the years until now with an approximate 25%. In most of the years, returns from REITs were higher.
6. Taxation as Ordinary Income
When the shareholders receive the 90% of income passed on to them by REITs, it gets taxed as normal income. Tricky, right? As an investor who pays a lot in taxes, this may not be news to please your ears. But there’s good news; unlike corporate dividends that get taxed both at the corporate and shareholder level, REITs earnings get taxed only once.
As illustrated above, investing in REITs can be the best decision that you ever made, but only when you understand what you are doing. If you know the above facts about REITs, then the chances of you experiencing losses become minimal.
Benefits derived from owning REITs are enormous and long-lasting, but that shouldn’t lure you to jump into it blindly.
Are you in or interested in investing in REITs? Then you now know!