You typically think of investment diversification in terms of cash, stocks, and bonds. But you might be reading this sitting in a form of diversification that you’ve never known about or considered: real estate. That’s right. If you’re in an apartment, work cubicle, doctor’s office, mall, or any other form of commercial property, you are potentially sitting in the source of a real estate investment trust, or REIT.
A REIT is a corporation that pools shareholders’ money and uses it to invest in commercial real estate like the ones mentioned above. Most REITs generate income by renting those spaces and distribute at least 90 percent of their profits to shareholders in the form of dividends.
Are you ready to get real with diversification? Then let’s dive in and learn more about REITs.
How can REITs help me?
- Diversification. REITs often move in the opposite direction of other investments—if stocks are going down, REITs are often going up.
- Protection from and growth potential during inflation. When commercial property owners raise rents in response to inflation, their income increases and so does the REIT’s value.
- Tax efficiency. A portion of a REIT’s dividends are classified as long-term capital gains and is taxed at the long-term capital gains rate (15 percent for most taxpayers) and not as ordinary income. REITs can also make sense in a tax-advantaged account like an IRA, where their relatively high income stream can be tax deferred until withdrawal.
What are my risks?
- As goes the real estate market, so go REITs. If the entire market experiences a downturn and property owners have to decrease rents and/or absorb increased vacancies, then shareholder income will shrink.
- Similarly, if a REIT is tightly focused in one property type or market that faces a financial drop, then returns will be equally impacted.
You can minimize your risk exposure by investing in REITs that are diversified both geographically and by property type.
Who can help me invest in REITs?
A broker can help you buy REIT shares the same way you would buy stocks. You can also invest in mutual funds or exchange-traded funds that invest in REITs. Before you invest, you should consult with your trusted advisor to determine if REITs are appropriate for your portfolio and, if so, how much you should invest.
Exchange-Traded-Funds (ETFs) and mutual fund values will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. ETFs trade like stocks on the open market, which in most cases involves a commission.
Investors should consider the investment objectives, risks, and charges and expenses of an ETF and mutual funds carefully before investing. A prospectus which contains this and other information can be obtained from your financial professional. Please read the prospectus carefully prior to investing.