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What are the REIT? Complete guide to real estate investment trusts

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Do you want to make money investing in REIT?

REIT stands for Real Estate Investment Trust. It is a special type of financial vehicle that has been a good place in the last 20 years. One of the main reasons why investors like REITs is the fact that they pay in cash, as a dividend.

The structure of a REIT helps you offer great profits to investors and minimize the taxes you pay.

There are some different types of REIT out there. All of them invest in some type of asset with cash, such as commercial real estate. There are also REITs that invest in mortgages, which have advantages and disadvantages.

If you are looking for an asset that will pay you to keep it and that could also increase its value, it is worth learning more about REIT. Many REITs can also be purchased with a simple stock trading account, which makes them an excellent way to establish yourself in real estate as a small investor.

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REITs have to pay investors!

The assets that make up the holdings of a REIT can vary, but whatever happens, they have to pay their shareholders (investors who own the REIT) 90% of their income to qualify as REIT in the US. UU.

What's so special about being a REIT?

It's about taxes.

A REIT is a form of unit investment trust, and instead of treating its income as profits, it flows directly to the holders of shares.

In essence, rental income is the business of a REIT. As a non-holder, he would receive income from REIT holdings immediately, which is why REITs seem to pay such high returns.

According to the IRS, a REIT must use these rules:

  • Any rental income must be treated as commercial income. Each and every one of the expenses related to the rental activities can be deducted from the taxes of a REIT, in exactly the same way that a company could deduct the commercial expenses.
  • In addition, the current income paid to holders of REIT shares is not subject to tax (YAY!), But if that income is paid to a non-resident beneficiary, that income will be subject to a 30% withholding tax. for ordinary dividends and a 35% capital gains rate (unless otherwise indicated).

The net result of this is a financial structure that is highly advantageous for investors. The trust structure that "owns" REIT's assets is basically tax exempt, unless it does not pay 90% of its income to non-holders or withhold cash for some other reason.

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REIT Unitholders can also earn taxes

The money REITs pay their owners will generally fall into one of three categories. Return of capital, ordinary income or qualified dividends. This makes the income of a REIT a bit more complex than a regular dividend, but it can also be advantageous for non-holders.

Depending on a person's financial position, the money they enter as ordinary income or qualified dividends may be preferable to other forms of income.

The real winner for REIT holders is the money that is paid as a return of capital, since this income will probably reduce the amount of taxable income for the non-holder in the year the money is received. It can also be deferred until the capital asset is sold, which could take years.

If you plan to make a large investment in REIT, it is a good idea to speak with a qualified financial planner about what type of income would be best for you. In any case, it is worth knowing the tax advantages offered by REITs and placing them in another class of assets that generate income.

The types of REIT you can buy

There are three basic types of REIT structures

  • REIT of variable income
  • REIT mortgage
  • REIT hybrids

A capital REIT invests in some form of income that generates real estate. There are some types of capital REITs, which will be described in more detail below.

Mortgage REITs are very simple. They invest in mortgages and transfer the income to their holders of shares.

A hybrid REIT is simply a REIT that owns capital and mortgages.

Breaking down REIT actions

Capital REITs will represent some form of ownership in a real estate asset that creates a revenue stream. With the exception of mortgage REITs, most of their own commercial real estate.

It is important to consider the health of the sector in which a REIT invests, since those tenants will be responsible for creating the income that will flow through the REIT to you!

REIT mortgage

Mortgage REITs generate income by buying mortgages of all kinds.

Unlike synthetic mortgage bonds, mortgage REITs tend to own mortgages directly. As we learned in 2008, not all housing markets are created in the same way. Mortgages owned by a REIT mortgage will determine how it works, so knowing something about the areas where you invest is vital to your success.

Like any other form of loan, the greater the risk, the greater the return on investment. Most mortgage REITs try to create a diversified portfolio by buying a range of mortgages, although some seek to create higher returns by focusing on higher risk loans.

Residential REITs

Residential REITs are a more direct way of obtaining access to the income generated by residential properties. Many people think of single-family homes when residential real estate emerges, but residential REITs focus on larger buildings or apartment complexes.

There are many levels of residential properties, and each type will have benefits and disadvantages. The location is also a big problem, and you should search the stock of any REIT before buying it.

One of the biggest advantages of residential properties over other types is that people absolutely need a place to live. Depending on which socio-economic demographic group a residential property serves, it could be very resistant to an economic recession.

On the negative side, low-income housing tends to be in areas that are not worth as much, which could mean lagging performance when an economic boom hits.

Other residential REITs specialize in student housing, which tend to be a very consistent market. Schools have a new crop of students every year, which makes these REITs a good bet for consistent income.

Regardless of the type of property, rents tend to keep pace with inflation, which makes it worth learning more about residential REITs.

Pros:

  • Residential REITs tend to generate stable income.
  • Residential real estate may be more resistant to a recession in economic conditions.
  • There will always be a demand for some forms of residential real estate.

Cons

  • Residential real estate may be subject to higher damage rates than other forms of real estate (this means lower profits).
  • High-end residential real estate may be affected when economic conditions worsen.

REIT retail

REIT retailers invest their capital in real estate that caters to the retail industry. They will generate income based on the rent paid by retail tenants, all of whom will have long-term contracts.

The retail real estate sector was a solid investment for many years. As the US economy UU. It has shifted to the "Amazon" model, where consumers buy online in increasing quantities, retail real estate has become a mix from an investment point of view.

In the United States, the retail real estate sector, such as shopping centers, has suffered in recent years. Stores like Sears and Toys R Us have gone bankrupt, which makes it difficult to be super optimistic in the sector in general.

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Bargain Potential

Remember that REITs have to pay the vast majority of their income to non-holders. That means that if a REIT collects some retail properties at a low price and rents are recovered, the value of REIT's revenue will increase.

In the real world, Amazon has been snooping around almost abandoned retail properties and looking for places where they can become distribution centers.

While a heavyweight like Amazon is more likely to only buy retail properties directly, that one-off win would make a delightful payment for non-REIT holders.

In any case, retail REITs do not currently offer the same level of security as residential REITs, but there is room for them to offer surprises given the market depression.

Pros

  • Commercial property in the United States has been torn down and may present value at this point.
  • Some areas appear to be more resistant to retail real estate blues and can be negotiated at a discount due to the general direction of the market.
  • Retail rents tend to keep up with inflation, although this is no longer as true as it was before.

Cons:

  • The retail real estate sector has been shattered for years and is not the safest place to invest.
  • There is currently a substantial amount of empty real estate in the market.

Office REITs

If you think the commercial world is doing well, buying a REIT that has offices could be a good idea. Like any REIT, office REITs rely on their tenants to create cash flow. Office REITs have companies that pay rent for office space as their customers.

Stop and think about all the office space in the United States. Each state has a few large cities, and there are numerous offices that serve businesses in those areas.

You may have heard that the most important thing in real estate is "location, location, location", and this is very true for office buildings. Unlike residential property, companies will only rent office space if they absolutely need it, and its use can change rapidly depending on the overall economy.

If you are interested in office REITs, it is important to know a lot about the type of office space you own and exactly where you are. In many areas, the space of a few miles can separate first-tier real estate from the row, which makes a big difference in regards to income.

Pros:

  • Office REITs tend to rent long term.
  • Most companies have "deeper pockets" than people and can meet their obligations.
  • Offices are a necessary part of a larger business, and are relatively difficult to close once they are established.

Cons:

  • Investors should investigate a lot when they invest in offices, since each market will have many nuances.
  • Offices are often one of the first things that are cut from the budget when an economic recession occurs, and this affects the income of a REIT office.

Health REIT

It is no secret that medical care is a big business in the United States. Health REIT has hospital buildings, as well as nursing homes and other care centers.

There are many people who are approaching old age in the US. UU., And this represents a potential opportunity for health care REITs. Older people consume health services in much larger quantities than younger people.

The United States also has an "insurance culture" in regards to medical care, which may or may not present risks to the REIT business model of medical care.

Hospital admissions that have a large number of patients using Medicare or Medicaid will only be as strong as the insurance programs that support their patients. If you are interested in health care REITs, it will be important to deepen the specific type of health care facilities that support REIT sources of income.

Pros:

  • One of the few areas of the economy that virtually guarantees growth over the next decade.
  • Vital service for the economy (unlike retail).
  • Constant returns, especially for nursing homes and other managed care centers.

Cons:

  • Medical care in the United States is constantly changing, with "Obamacare" under greater scrutiny.
  • Medical care is a general term (see below).

The health industry is a diverse market

Of all types of REITs, there are REITs for medical care that may be the most resistant to deterioration of economic conditions. The reason for this is simple, unlike other forms of economic activity, health spending is rarely voluntary.

People end up in hospitals and care centers because they need help, not because they want to use their insurance. With an aging population that will need increasing levels of care, health care REITs are at an optimal point (on a relative basis), no matter what happens in the general economy.

That said, it is extremely important to understand how the health REIT in which you choose to invest generates income. The situation of medical care in the USA. UU. It is changing, and the interruption of state-sponsored medical benefits could affect medical facilities that rely on de facto government funds to remain profitable.

Hospitals

Owning the land on which a hospital is located or the building on which it operates is a pretty good business model. Unlike the office or commercial space, there are not many options for hospitals. The construction of a hospital is a specialized project, which can offer REITs of medical care that have hospitals a unique advantage.

On the other hand, hospitals may decide to improve their facilities or look for a building they own. There is no guaranteed way to earn money, and there is always the risk that a hospital may go bankrupt or more.

Nursing homes

With the baby boom generation on the cusp of old age, it would seem that nursing homes are the perfect place to invest. The sector as a whole can be one of the best places to be an investor, no matter what happens in the economy in general. That said, it is important to analyze exactly what type of facilities a REIT has that owns properties of nursing homes.

Private insurance v. Public assistance

One last thing to consider in the REIT health care space is where REIT tenants get their money.

This is a consideration regardless of what type of REIT you are evaluating. It is especially important in the health sector, due to the fact that almost no one can pay for healing services without some type of insurance in the United States.

People rely on public insurance programs, such as Medicaid, or the private insurance they receive from some other source. With all the changes in public programs in recent years, it is especially important to consider any REIT that indirectly depends on public insurance to generate profits.

REITs tend to produce solid returns

It is difficult to find another class of assets that has been as constant as REITs. While there are many REITs out there, the FITE NAREIT Equity REIT index is often used as an indicator for the REIT sector as a whole.

In the 20 years that ended in 2010, the FTSE NAREIT Equity REIT index returned almost 10% per year, every year. Apart from medium-sized US stocks, that is the best return asset class in US markets.

Returns since 2010 have been solid and more or less in line with historical results. One of the reasons why REITs have been so stable is the fact that EE. UU. It has been in a long-term expansion since the early 1980s, and real estate was an obvious beneficiary of a good economic environment.

There are emerging risks in real estate

Since most investment products have a legal obligation to inform you, do not assume that past performance is a guarantee of future returns.

The national economy in the United States has been changing and the real estate sector is constantly changing. REITs were able to withstand a wave of economic expansion and low interest rates that allowed people to buy much more than their income would normally allow.

An easy money-booming boom began in the mid-1990s, but it really warmed up after the collapse of the dotcoms in the early 2000s. We all know how the mortgage loan crisis reached a critical point in late 2007, and that without new forms of intervention by the central bank, the financial landscape would be very different today.

In the last two years, there has been a massive collapse in retail stores in the United States, but it could be the first sign of another impending collapse. REITs may not average yields of 10% in a period of long-term economic decline, especially in real terms (adjusted for inflation).

Undoubtedly, there are real estate areas in the United States that can generate solid returns for REIT investors, but it will not be as easy as it was during the last quarter of a century.

REIT investors should not only obtain the correct address of the real estate market in general, but they should also know much more about the areas in which a REIT invests. This is not the same market that a REIT buyer would have found in 2003, so consider the risks that exist.

Are REITs right for you?

REITs fall into a unique investment niche. For investors who can do a little research on what type of property a REIT invests in and the general direction of the economy, REITs have the potential to generate large profits.

Despite recent difficulties in the retail sector, there are probably some excellent REITs in many areas. Offices in major cities (such as New York, Boston or Washington D.C.) are likely to be good people, even if there is a continuing weakness in the general economy.

REITs have many of the same benefits that commercial debt offers to investors. In addition to generating income higher than government bonds, REITs grant investors direct ownership of real estate that generates income.

For investors who want to get access to real estate, but don't want to borrow and buy rental properties directly, REITs are a great way to invest. They also allow investors to distribute their money in a number of properties and sectors, which would be almost impossible for smaller investors in any other way.

REITs will not be as easy to invest as they were a decade ago. The real estate boom that helped REIT generate constant returns for 20 years is probably over. With a little research, investors can still find many opportunities in an asset class that provides income and direct ownership of real assets.

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Disclaimer: The opinions expressed herein are only those of the author, not those of any bank or credit card issuer and have not been reviewed, approved or endorsed by any of these entities.

Disclaimer: The answers below are not provided or commissioned by the bank advertiser. The responses have not been reviewed, approved or supported by the bank advertiser. It is not the responsibility of the bank advertiser to ensure that all publications and / or questions are answered.

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