Real estate investment trusts, or REITs, offer a number of benefits to investors. One of the biggest is that they provide exposure to commercial or residential property without requiring an upfront commitment of cash, and they offer more liquidity than direct ownership. But REITs also come with some drawbacks that you need to understand before investing in them.
Direct ownership of property requires a substantial sum of money for a down payment and ongoing expenses like taxes, insurance and maintenance. REITs allow everyday investors to gain access to real estate in a diversified way with smaller investments that are easier to manage than purchasing and maintaining individual properties. For more info https://www.sellmyhousefastntx.com/we-buy-houses-fast-plano-tx/
REITs buy, operate and manage commercial properties such as office buildings, shopping malls and data warehouses that generate income from rent paid by tenants. They also invest in mortgages and derive income from interest payments. REITs can be broadly diversified or focus on a specific type of property such as hotels or shopping centers, and they can have different tenant mixes depending on their niche. That diversification can help mitigate the risks of a single REIT going bust.
If you invest in REITs through tax-advantaged accounts such as retirement accounts or IRAs, you can receive their dividend payments tax-free. But if you hold REITs in non-tax-advantaged accounts, your dividends are taxed just like other income from stocks and mutual funds.
As of January 2020, REITs on average pay dividends of around 3.93%. But you may be able to find REITs that offer higher yields in certain sectors, such as student housing or healthcare real estate.
Another drawback of REITs is that they can be sensitive to changes in interest rates, with rising rates hurting their prices. REITs that primarily invest in debt rather than equity, such as mortgage REITs or healthcare REITs, can be especially vulnerable to changes in interest rates since their income depends on the payments received from their loan holders.
REITs may be a good fit for your portfolio if you have a long-term time horizon and are looking to diversify your investments beyond stocks and bonds. But if you’re a short-term investor, it might be better to avoid them because they typically don’t pay much in the way of interest, and can lose value when interest rates rise.
Before investing in REITs, spend some time researching several options to find the ones that best match your financial goals and risk tolerance. Once you’ve narrowed your options, it’s a good idea to consult with an investment professional for personalized guidance and support on how to integrate REITs into your overall investment strategy. Our SmartVestor program can match you with a financial advisor or investment professional who can answer any questions you might have about REITs.