Investor income is generated through renting, leasing and selling of the property and distributing the returns to REIT holders. This type of investment allows for a long-term outlook and potential income returns through rent and property appreciation. The industry paid out about $13.5 billion in dividends last year, according to NAREIT (the National Association of Real Estate Investment Trusts).
Pros and Cons
What happens to this income is where the big benefit to investors comes in: REITs are required to distribute almost 90% of their yearly taxable income to shareholders. This income deductible at the corporate level is taxed at the personal level – there is only one level of taxation for distributions.
However, the major downside to investing in a REIT also involves the dividend. That’s because the REIT has 10% of its profit to reinvest, which makes for slower growth. REITs are also touchy about interest rates, and prices have an inverse relationship to them. This may also account for their strong performance, since interest rates have been at record lows for more than a year.
By pooling the assets together, REITs also reduce risk and provides greater diversification since capital is distributed through numerous properties. If an individual were to mimic such a strategy, one would have to buy multiple properties, which is rather unlikely for the average retail investor. Investments in REITs are also a more efficient diversifier since REITs are more liquid as opposed to investments tied to physical property.
If you’re considering the addition of REITs to your clients’ portfolios, the ETF Analyzer has them all. From there, you can sort by performance, yield, assets and more.