You may or may not know that REITs (real-estate investment trusts) that invest in all sorts of commercial real estate, have been a favorite of investors for years. Why are REITs a favorite? There are a few reasons why.
Get used to volatility
REITs can definitely play it hot and cold, and they aren’t a set it and forget it type of asset. They require vigilance and a careful eye, which may be a big deterrent for some investors. REITs tend to only move in drastic ways in either direction, which also mimics how they trend for investors. So expect big ups, and followed by downs, and not a lot of in-between. It’s an exciting game to play, and if you’re up for the challenge, there could be big dividends in store.
They’re not for short-term investors
Because of their volatility, REITs are for those who play the long game (those who plan to let their money and assets work for them). They perform best when given the time. Long periods of time. From 1975 to 2020, REITs had an annualized return of 14.1%, so when it’s compared to performances by the S&P at 12.2%, it’s easy to see their appeal. Given time to shine, REITs can be a good source of income for your retirement portfolio.
Now it’s possible to invest in international REIT funds; some are global; others own only properties outside the U.S. These multinational funds don’t have long return histories, but the experts who follow them believe that combining the U.S. and international real estate investments will produce higher returns than the S&P 500 index, along with currency diversification.
Distributions are taxed as income
REITs can be tricky at tax time. By law, REITs must pass 90% of their income through to shareholders, who are liable for taxes on that income without the benefit of a favorable capital-gains tax rate. The distributions are taxed as ordinary income, in other words. That’s not great news for investors in high tax brackets.
However, there’s a good side to this arrangement. REITs’ income is taxed only once, at the shareholder level. This is unlike corporate dividends, which are taxed once at the corporate level and then taxed again to shareholders. Hence the term “double taxation”.
Because of this, REITs are best suited for tax-deferred entities such as IRAs and 401K accounts.