One of the realities that I recognize in my life is that I am really not that interested in being a landlord.
However, the idea of having real estate in my portfolio is one that is of interest to me.
So, how do I go about adding real estate to my investment holdings without becoming a landlord, or needing huge amounts of capital to buy property?
You can use a Real Estate Investment Trust (REIT) to help you out.
What are REITs?
Real Estate Investment Trusts are collections of investments related to real estate.
They have a different structure than ETFs, but they are similar in that you can trade them on an exchange. REITs are considered equities, even though they represent a collection of holdings related to real estate. In addition to exchange-traded REITs, there are also private REITs and non-traded REITs.
There are a number of REITs to choose from, each with its own way of doing business.
Some REITs focus on residential markets, investing in home loans. Others look at commercial property. Some REITs also include stocks from real estate companies, or management firms, or even self-storage companies. There are also REITs that include direct ownership of properties. You can also find REITs that offer a mix of different types of real estate related investment.
As you might expect, REITs include properties and investments that vary according to geography. There are those that focus on foreign real estate, and those that focus on domestic properties.
No matter what you are looking for, there is likely a REIT that can provide you access to what you are looking for.
It’s worth noting that there are also ETFs that include REITs. It’s possible to further ease the process with the help of ETFs that can really help you take your dollar cost averaging strategy with real estate related investments to the next level.
Dividends and REITs
The legal structure of REITs means that they are required to pay out dividends regularly.
Indeed, REITs pay out at very high dividend rates. This is one of the reasons that REITs are becoming increasingly popular. You can add real estate to your portfolio — and receive regular income to boot.
However, you do need to be wary.
Even though REITs offer generous dividend payouts, they also represent a segment of the economy that has been somewhat volatile recently. After the financial crisis, REITs took a huge hit. Additionally, toward the end of 2011, recovering REITs took another hit as the European crisis really started heating up.
Just like any other investment, you have to carefully vet the REITs you choose for your portfolio. The state of the housing market means that you can still find some good deals, but it also means that you are subject to some of the swings and disappointments that are a part of the current landscape.
Related: Best Online Discount Brokerages
Investing in REITs
As you add REITs to your portfolio, pay attention to the realities of what to expect — especially in terms of taxes.
Right now, qualified dividends enjoy a preferred top rate of 15%. This is not the case for most REITs. Because corporate income tax is usually not paid by REITs, there isn’t a preferred rate; you usually (but not always) have to pay taxes at your current tax rate on the dividends you receive.
If you want to reduce your tax liability due to REITs, you can add them to your tax-advantage retirement account. Keep your REIT in a 401(k) or an IRA, and you will reap the benefits of tax-favored status for your dividends. However, you won’t be able to withdraw these earnings from your account until you reach the penalty-free age. If you plan to use REITs for income, rather than help boost your retirement portfolio, you will need to resign yourself to paying the corresponding taxes.
REITs can provide you with a little more diversity in your investment portfolio.
They offer you an opportunity to add real estate to the mix without huge capital requirements, and you can take advantage of how easy it is to trade them. Carefully evaluate your portfolio and your investment needs, and consider whether or not REITs could help you enhance your strategy.