Are REITs Still a Good Investment?

Are REITs a Bad Investment now?

     REITs, or real estate investment trusts, are business companies that are engaged in real estate finance. They own and finance real estate, which in turn generates revenue from several property sectors. These real estate investment firms must meet a number of requirements to qualify as a REIT. The vast majority of REIT investments are traded on major stock exchanges, and they offer investors great returns.

How does REITs make money? Real estate investment trusts (REITs) are the primary reason when creating a portfolio of equity or fixed income. REITs provide greater overall diversification, potential returns and lower overall risk. Thus, the ability of a REITs company to earn dividend income along with capital gains makes it an excellent counterweight to cash, stocks and bonds.....(investopedia.com).

One of the main reasons to invest in REITs is, the exposure they provide to residential, real estate, commercial, or retail without making you have to purchase individual properties outright.

This provides the opportunity for individual investors, or smaller institutions, to reinvest without the substantial financial commitment to due diligence, or the privileged risks that come with investing in individual property.

In order to qualify as a REIT provider, REIT investment companies are required to pay at least 90% of their taxable income to shareholders. That makes REITs a source of great dividends. Investors get REITs to co-purchase, because they like the returns. Especially now, with interest rates that are historically low.

As of January 2020, dividends on shares of REITs have paid out about 3.93%, according to data and information analyzed by the NYU Stern School of Business, though certain REIT sectors may also offer higher dividend payouts. For context, the S&P 500 REITs fund delivered a dividend yield of approximately 1.71% in August 2020.

What Are Real Estate Investment Trusts (REITs)

Real estate investment trusts ("REITs") enable you to make large-scale real estate investments and generate income. The meaning of REITs is a business enterprise that owns, and generally operates in, real estate that generates money or income, and related assets.

This can also include office buildings, shopping centers, hotels, resorts, warehouses, apartments, self-storage facilities, and mortgages or loans. Unlike other real estate companies, REITs do not make property or housing for resale. A REIT company buys and develops property, primarily to operate it as part of its own investment portfolio.

How Do REITs Work?

Congress created the real estate investment trust in the 1960s, as a way for individual investors to acquire and own equity stakes in real estate companies on a large scale, just as they could own shares in other businesses. This action makes it more convenient and easier for investors to buy and trade a wide variety of real estate portfolios.

REITs as an investment vehicle must meet the positive standards set by the IRS, including:

- Returns at least 90% of taxable income, in the form of shareholder dividends annually. This has become a big enough attraction for investors to invest in mutual funds.

- Has at least 100 shareholders, after the first year the company was founded.

- Receive at least 75% of the gross profit from real estate, such as property rentals, property financing mortgage interest or from sales of real estate.

- Invest at least 75% of all property in real estate or cash.

- Owns a maximum of 50% shares owned by 5 people or less during the last 1/2 tax year.

By complying with these rules, REITs don't have to pay taxes at the company's normal rate, allowing them to finance real estate cheaper than a non-REIT company can. This means that over time, the REIT can grow in size and pay higher dividends.

Pros and cons of REITs

Pros of REITs

Despite a solid track record of performance, investors have a number of reasons and motives for supporting REITs:

- Large dividend yields, stemming from a legal mandate, to pay for income, and are supported by constant cash flow from rental properties.

Less correlated with a larger, broader market, that means REITs are driven by a differentiating factor than most stocks, so they can provide a diversified REIT benefit.

- Property diversification, which means REITs are often invested in dozens, or even multiple properties, so that their success is not based on just a few assets, unlike the portfolios of a few independent landlords.

- No headache management, investment allows you to rest well, you don't have to take care of a broken air conditioner at 3am, or deal with fussy tenants.

These advantages are some of the most important for investing in REITs, relative to any stock, and direct investment in rental properties.

Cons of REITs

Investors prefer to buy specifically for the following issues when they are investing in REITs:

- High debt burden, especially in business enterprises, as REITs finance properties with as much influence as the average homeowner. Investors must ensure that the group of reit investment firms is able to manage debt, and continue to pay dividends.

- Non-traded REITs and private REITs that do not share the same high standards of governance as publicly traded REITs.

- Potentially unsustainable dividends to avoid, if you are investing in individual REITs. If a REIT reduces its dividend, its share price will drop, or may fall, in anticipation of the cut.

- Increases interest rates, which may have an impact on REITs stocks in the short term, as buyers sell them based entirely on the popular consensus that a rate hike recommends lowering REITs. But usually, that doesn't crush them in a long bull market.

- Property prices are actually high, which can help push up the price of REITs, but this value can eventually drop too, hurting REIT costs.

Before You Invest: Things to Note

Don't expect that REITs are low-risk, and dividend income is recurring. Read your prospectus and search for reviews to identify the best investment goals and REIT methods.

Find the data for the three main fields below:

- Information about REIT supervisors – their journey and track record, and where applicable, REIT sponsors and asset channels

- Information about the place of residence to be included in the REIT – in particular, whether you know the geographic exposure and area of the REIT in which you wish to invest.

- Other funding records like dividend coverage, fees and expenses.

REITs can have unique structures, foci, or geographic zones, and some REITs may also carry additional risks, such as political and regulatory risks, than others.