The purchase of a family home represents a typical investment in real estate for most Americans, but one that rarely generates income. Others may purchase second homes and rent them out to earn extra income, but they endure the hassle and challenges of life as a landlord in return. Some real estate investors prefer to invest in commercial real estate, that is, shopping centers, office buildings, etc. While the average investor may not have the cash or credit line to purchase an entire shopping center or apartment building, there is a simpler – and cheaper – way to invest in those types of properties and benefit from the income they generate, without having to endure the headaches a landlord may face.
According to independent Certified Financial Planner™, Mark Dennis of A1A Wealth Management, Inc., “Real estate investment trusts, or ‘REITS,’ operate similar to mutual funds and enable the average Joe or Jane to invest in large-scale real estate projects relatively inexpensively. A typical REIT pools the money of many investors in order to purchase these properties outright, or to invest in mortgages or even lend money outright to property owners.”
The National Association of Real Estate Investment Trusts (NAREIT) reports more than 100 REITS are traded publicly, with annualized returns of 11.78% over the last 10 years, and return of 19.70% in 2012. Dennis further states that REITS can be an attractive addition to one’s investment holdings because each REIT comes with a built-in management team, provides additional diversity among investments, and unlike individual real estate, they are highly liquid. Shares of REITS are traded on stock exchanges, making them much easier and quicker to sell than direct investments in real estate. Of course, like direct real estate, REITS can, and do, lose value, as with any investment. “REITS allow you to be a ‘lazy landlord’ without being an irresponsible landlord,” says Dennis. REIT investors enjoy the ownership and income from the real estate investment without the burden of maintenance, excessive amounts of paperwork, and dealing directly with tenants.
REITS may also offer tax advantages to investors. According to the tax code, REITS are required to distribute at least 90% of their annual taxable income as dividends to shareholders, which means the REIT pays no tax itself. This avoids the double–taxation of dividends that occurs with corporate stock dividends, which are taxable to the corporation first, and again to stock investors when dividends are distributed. Investors may also treat a portion of REIT income as a return of the individual investment, which reduces the potential tax burden. Otherwise, dividends are taxed as ordinary income to the investor, and REIT investors should consult with their tax advisors for specific tax advice. Before investing in REITS, individuals should also consult with their personal financial planners regarding the suitability of these investments for their investment portfolios.
For more information about this topic, contact Mark Dennis at 904-491-1889 or email mark@A1Awealthmanagement.com (mailto:mark@A1Awealthmanagement.com) .