REITs May Be The Single Easiest Way to Invest In Real Estate

Real Estate Investment Trusts (REITs) invest in a variety of real estate and related asset-backed securities.

Office space is one type of commercial property that REITs invest in.

While buying real estate can be a great investment, there are also ways to invest in it without actually directly acquiring property. It’s a little easier than buying property, renting it out and managing tenants.

In this case I’m talking about a vehicle called a Real Estate Investment Trust (REIT). REITs are akin to partnerships, and were created as a result of legislation in the 1960s to provide investors with additional opportunities to invest in real estate, and receive advantageous tax treatment compared with how they would be taxed as shareholders of a corporation.

REITs buy and operate real estate in a variety of sectors, with some specializing in office space, warehouses, shopping centers or apartments. Others, known as mortgage REITs (mREITs) invest primarily in securities backed by pools of mortgages. Some REITs are publicly traded just like conventional stocks.

The main benefit of REITs is they are pass-through entities. As long as they pay out more than 90 percent of their profits to shareholders, they pay no Federal income tax. Profits are paid as dividends to shareholders, who then pay income tax on their portion.

This avoids double taxation. If the business were structured as a corporation it would be subject to corporate income tax, and then shareholders would have to pay income taxes on the dividends received. That’s the key concept behind REITs (be sure to consult a tax professional for your specific situation).

The REIT structure offers investors the opportunity to invest in real estate and earn solid dividends while reducing taxes. Publicly traded REITs also provide a high degree of liquidity that is not inherent in traditional real estate investment. If you wanted out you could sell your shares on the market faster than a Rotweiller pouncing on a sirloin steak.

The downside, of course, is that individual investors don’t have control over how the business is operated, the actual properties themselves, nor a say in the acquisition, operation and divestiture of any specific property. They are investing in a portfolio of properties or mortgages managed by professionals. However, the anticipated availability of crowdfunding may offer alternatives that address this.

Several years ago I read about a REIT that invested in car dealerships. It would buy the land and buildings and lease it back to the dealers, generally family owned businesses, to provide additional working capital. I bought a few thousand dollars worth of stock and they did well enough that management bought out existing shareholders and took it private. It was like getting kicked off the bus after a good trip.

This is not to say that there aren’t risks to investing in REITs. Just like any other investment, caveat emptor is the order of the day. Investing in REITs is largely like investing in stocks. To get started you’ll want to research the REITs on the market, review their annual reports and SEC filings, and make any purchases through a regular or IRA trading account from any number of reputable brokerages. Check out the National Association of REITs for more background and the latest industry news.
Photo courtesy Michael Jastremski

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