To avoid risk, it is prudent to diversify your investment across a variety of asset classes. Real estate investments should form part of this portfolio diversification.
One of the easiest, low-risk ways to enjoy real estate returns without the stress and risk of owning property, is through a real estate investment trust, also known as a REIT.
Real Estate Investment Trusts
If you’re interested in receiving high rates of return, then REITS have a history of high dividend payouts. This is one of the reasons that they are in such high demand by retirees. If you don’t need the income, then you can grow your investment by reinvesting the dividends.
Mutual funds and ETFs invest in a variety of REITs in order to enjoy a diversified risk profile.
The Advantages of REITs
REITs offer a unique opportunity to diversify your financial portfolio. You benefit from the high returns of real estate without the danger and volatility of equities. In addition, real estate and equity returns have a positive correlation, helping to insulate your investment from market swings.
Your real estate investment also enjoys sector diversification. You’ll own interests in various properties across several market sectors as a REIT investor. You’ll be exposed to industrial warehouses, commercial properties as well as apartment complexes. You’ll find that funds include bigger properties like hotels or office buildings that many investors can’t access.
You also get to invest in property across a host of geographical locations. You’ll enjoy fractional ownership in properties across states, cities, and countries.
And if you are a foreign investor, restrictions on owning properties in other countries are avoided by acquiring shares in REITs.
You get to enjoy above-average dividend yields with at least 90% of taxable income paid to investors by law. This ensures excellent returns when reinvesting dividends as well as on capital appreciation.
The combination of high dividend yields and property’s long-term capital appreciation make REITs an excellent investment. While selling an individual property is time-consuming, REITs are highly liquid, allowing investors to move in and out of the funds quickly if funds are required.
One of the biggest benefits of REITs is their ability to offer access to commercial properties such as shopping malls, data centers, and apartment complexes. Unless you have the resources, class A office buildings are beyond the reach of average investors. REITs provide you with access to these lucrative investment opportunities.
Disadvantages of REITs
While REITs offer investors many advantages, there are some disadvantages to owning them.
Interest rate fluctuations can have a significant impact on yields. As interest rates increase, the price of REITs falls.
The tax on REIT dividends falls outside of the capital gains tax rate. What this means is, that you’ll be paying tax at your ordinary income tax rate.
There is the potential for high fees and increased risk. You are advised to research the property market thoroughly as well as take note of interest trends, the effect of tax law changes, as well as property values in the various property markets. High management fees can also affect your returns and a careful reading of the fund rules will go a long way in helping you identify potential pitfalls.
REITs are best for longer-term investments. So, you should avoid investing in them if you think you’ll need the money in the near future.
Direct Property Ownership
Investing in single or multi-family dwellings allows you to benefit from high rates of return. With the proper structuring, there are numerous tax advantages to investing directly in property.
Apart from the capital appreciation, you will enjoy increasing annual cash flow from the right properties.
Moses Nae, CEO of TaxLeaf, Contador Miami, and the founder of Contador America is passionate about helping business owners and investors maximize their returns.
It is crucial that you consult with a knowledgeable and experienced accountant to help guide you when investing in property, especially if you are looking for ways to reduce your taxes while at the same time protecting your investment returns.
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