While real estate investment trusts are not tax free, they are partially tax-deferred, which increases the effective tax-equivalent distribution (TED) when compared against many other investments. The following calculator helps REIT investors see the equivalent fully taxable investment yield they would need to achieve to match the distribution generated by a REIT they have invested in. A portion of distribution from REITs is considered a return of capital (RoC). This calculator helps investors see a REIT's hypothetical distribution and how the RoC impacts the tax equivalent distribution.
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While REITs typically offer superior returns to ordinary savings accounts, some investors like to keep a portion of their capital liquid for diversification purposes and to take advantage of price mismatches driven by temporary liquidity issues. Some investors try to stay fully invested and have back up sources of credit on hand using a revolving HELOC.
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Our rate table lists current home equity offers in your area, which you can use to find a local lender or compare against other loan options. From the [loan type] select box, you can choose between HELOCs and home equity loans of a 5, 10, 15, 20, or 30-year duration.
The Fundamentals of Real Estate Investment Trusts (REIT)
REITs are investment equities often used by investors who want to increase yields on their portfolio. They are known for high dividend returns that allow individuals to invest in large-scale income-producing properties. REITs are corporations that own and operate commercial real estate, including properties such as shopping malls, office buildings, hotels, and storage facilities. Unlike other real estate companies, REITs do not purchase and develop properties to sell them. Instead, REIT corporations operate properties to include them in their own investment portfolio. When REIT companies earn profits, they pay out at least 90% of their taxable income to shareholders.
REITs offer a primary advantage: they allow individual investors to buy a share of commercial real estate without buying and operating the property themselves. This is how you can include real estate in your investment portfolio. But before investing in REITs, you must understand how they work, including their benefits and drawbacks. Read on to find out more about REITs and how you can use them to your advantage.
What are REITs?
Real estate investment trusts (REITs) are companies that own, manage, or finance income-generating properties across a diverse range of market sectors. In order to qualify and maintain REIT status, these companies must satisfy certain distribution requirements. Specifically, they must distribute a minimum of 90% of their income to shareholders in the form of dividends.
According to the National Association of Real Estate Investment Trusts (NAREIT), to be eligible as a REIT company, a business must meet the following conditions:
- Invests 75% of its total assets in real estate.
- Must be an entity that is taxable as a corporation.
- Must be managed by trustees or a board of directors.
- Must have a minimum of 100 shareholders.
- Must have no more than 50% of its shares held by five or fewer individuals.
- Pays at least 90% of its taxable income in the form of shareholder dividends per year.
- Obtains at least 75% of its gross income from rents on the property, from interest on mortgages financing the property, or from sales of the property.
REITs invest in a variety of commercial real estate properties, such as apartment buildings, hotels, retail complexes, and warehouses. They also invest in cell towers, data centers, offices, and medical facilities. These properties are grouped specifically into 13 REIT sectors. Generally, REITs concentrate investments on particular property types, such as residential, resort, or retail properties. But some may hold multiple types of real estate in their portfolios.
NAREIT notes that collectively, REITs of all types own over $3.5 trillion in gross assets throughout the U.S. Meanwhile, stock-exchange listed REITs own an estimated $2.5 trillion in assets, which represents over 500,000 properties. Overall, the equity market capitalization of U.S. listed REITs is estimated at more than $1 trillion.
How REITs Work and Generate Income
REITs earn income by leasing space and obtaining rent from their real estate. The income they generate is then paid out to shareholders in the form of dividends. REITs are required to pay out at least 90% of their taxable income to shareholders, and most can even pay out 100%. In exchange, shareholders pay income taxes on those dividends. In the case of mortgage REITs (mREITs), note that these companies do not directly own real estate. Rather, they finance properties and generate income through interest on their investments.
When you invest in REITs, you'll notice that they behave similarly to mutual funds and are bought and sold like stocks. Like mutual funds, REITs pool together capital from numerous investors. Meanwhile, most REITs are publicly traded like stocks. They possess the liquidity of traditional equities, making them easy to sell or purchase unlike huge capital for income property. REITs also exhibit bond-like qualities because they pay out most of their earnings by distributing 90% of their income through dividends. Note that dividends investors earn through REITs are treated as income, which is taxed accordingly. REIT companies are not subject to tax deductions like other types of corporations. So no matter how profitable the REIT, they pay zero corporate tax.
What's the main benefit of REITs? The Congress first established REITs in the 1960s mainly to allow more people to invest in real estate. REITs make it possible for anyone to invest in the commercial real estate market the same way they invest in other industries. When you invest in REITs, you can earn profits on commercial property without buying your own apartment complex or office building. It provides small-time investors the opportunity to own valuable real estate, gain access to dividend-based income, and the chance to help communities grow.
On the other hand, purchasing apartment buildings, hotels, and office facilities requires a huge amount of capital. People with limited capital cannot afford to finance real estate and rental management. These properties often remain illiquid unless owners sell or lease them out. But by investing in REITs, you can earn dividends from a diverse range of property sectors without managing or financing properties yourself.
How do you invest in REITs? You can purchase REIT shares listed in primary stock exchange directories just like other public stocks. You can also buy shares in an exchange-traded fund (ETF) or a REIT mutual fund. Popular exchange-traded funds that concentrate on REITs include the following:
- iShares Dow Jones US Real Estate (IYR)
- SPDR Dow Jones REIT (RWR)
- Vanguard REIT Index ETF (VNQ)
- iShares Cohen & Steers Realty (ICF)
To help you assess different REITs and the appropriate level of investment, you can consult a broker or investment advisor. Generally, publicly traded REITs can be purchased through a broker. Just note that brokerage fees will apply. If your broker participates in PNLRs or private REITs, which are not publicly traded, you may have the option to buy these types of REITs.
Individual investors can open a brokerage account and purchase individual REITs directly. A few of the largest individual REITs are the following:
- Simon Property Group (SPG)
- Equity Residential (EQR)
- Public Storage (PSA)
- Ventas (VTR)
- HCP (HCP)
As for non-publicly traded REITs, these are typically sold by brokers. But note that they usually have higher upfront fees compared to publicly traded REITs. Non-publicly traded REITs sales commissions and upfront fees typically cost around 9% to 10% of the investment. Consider this before buying shares from a non-publicly traded REIT, as this can substantially lower the overall value of your investment.
Why Invest in REITs?
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