Real Estate Investment Trusts (REITs) are a type of investment that allows you to invest in large-scale real estate projects without having to actually purchase any property yourself. REITs are bought and sold on stock exchanges just like any other type of security, which makes them relatively easy to trade.
There are two main types of REITs: equity REITs and mortgage REITs. Equity REITs own and operate income-producing real estate, such as office buildings, shopping centers, or apartments. Mortgage REITs, on the other hand, lend money to real estate owners and operators for the purpose of financing income-producing real estate projects.
REITs must pay out at least 90% of their taxable income to shareholders in the form of dividends, which makes them an attractive investment for dividend seekers. In addition, REITs are required to pay very little in corporate taxes, which leaves more money available for dividend payments.
The Benefits of Investing in REITs
There are several benefits to investing in REITs, including:
-Regular dividend payments: As mentioned above, one of the biggest advantages of investing in REITs is that they are required to pay out at least 90% of their taxable income to shareholders in the form of dividends. This makes them an attractive investment for dividend seekers.
-Potential for high yields: Because REITs must pay out such a high percentage of their income as dividends, they often have high dividend yields (3-6%)
-Tax benefits: In addition to paying out high dividends, REITs also enjoy favorable tax treatment. For example, unlike most corporations, REITs are not subject to corporate income tax at the federal level. This leaves more money available for dividend payments.
The Risks of Investing in REITs
Of course, like all investments, there are also some risks associated with investing in REITs. These risks include:
- Interest rate risk: Rising interest rates can negatively impact the value of mortgage-backed securities held by mortgage REITs and make it more difficult for them to borrow money at favorable rates. This can lead to lower profits and lower dividend payments for investors.
- Dependence on economic conditions: The performance of real estate markets is closely tied to overall economic conditions. The key here is to focus on real estate sectors that have consistent demand and new supply barriers.
Investing in Real Estate Investment Trusts (REIT) can be a great way to generate regular income through dividends while avoiding the hassles of active property management.