Can you build wealth with REITs?
REIT Dividends And Tax Implications
REITs have been wealth-creating machines over the years. According to the data, REITs have outperformed stocks over the long term, delivering an 11.9% average annual return from 1972 to 2021 (compared to 10.7% for the S&P 500).
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
Some millionaires diversify their real estate portfolios by investing in Real Estate Investment Trusts (REITs). These publicly traded companies pool funds from investors to purchase and manage income-generating properties. A select group of millionaires takes on real estate development projects.
REITs can have a lot of value to offer investors. They're more liquid than physical properties and can be a steady source of income. They can appreciate (and depreciate) along with the broader real estate market, and allow you to hedge against stock market volatility. But before investing, do your research.
Most dividend-paying stocks (SCHD) make quarterly dividend payments. But real estate investment trusts, or REITs (VNQ), are a bit different. Quite a few of them pay on a monthly basis just as if you were a landlord collecting rent checks, month after month.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
REIT | Forward dividend yield |
---|---|
Blackstone Mortgage Trust Inc. (BXMT) | 12.1% |
KKR Real Estate Finance Trust Inc. (KREF) | 13.5% |
Easterly Government Properties Inc. (DEA) | 8.3% |
Realty Income Corp. (O) | 5.5% |
How many REITs should I own?
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Ticker | Name | Dividend Yield |
---|---|---|
EARN | Ellington Residential Mortgage REIT | 16.19% |
AGNC | AGNC Investment | 15.34% |
ARR | ARMOUR Residential REIT | 15.32% |
EFC | Ellington Financial | 14.78% |
![Can you build wealth with REITs? (2024)](https://i.ytimg.com/vi/nlz1K5UqaO4/hq720.jpg?sqp=-oaymwEcCNAFEJQDSFXyq4qpAw4IARUAAIhCGAFwAcABBg==&rs=AOn4CLA1UywTqkvAApRAOc2UMmYUGX9oXw)
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
With returns often above 10%, you'd need to invest around $360,000 to reach your monthly goal of $3,000. The risk is higher compared to traditional investments, so it's important to diversify your loans and only invest money you can afford to lose.
Getting out of a non-traded real estate investment trust, or REIT, can often be rather difficult and expensive. Once a REIT is closed to new investors, the board of directors of the REIT can suspend the redemption policy.
Share prices for US real estate investment trust stocks jumped in the fourth quarter of 2023, outperforming the broader market.
Here are some of the main disadvantages of investing in a REIT. Market volatility: Value can fluctuate based on economic and market conditions. Interest rate risk: Changes in interest rates can affect the value of a REIT.
REITs historically perform well during and after recessions | Pensions & Investments.
There are a few scenarios where you will risk losing your investment in REITs. * Poor / over-leveraged balance sheet. For e.g. interest from their debt is higher than their rental revenue.
Here are some of the main disadvantages of investing in a REIT. Market volatility: Value can fluctuate based on economic and market conditions. Interest rate risk: Changes in interest rates can affect the value of a REIT.
How much does a CEO of a REIT make?
The average level of REIT CEO compensation was $4.50 million in 2006 followed by a decline to $3.29 million in 2009 due to the financial crisis. It increased to $5.27 million in 2012 and rose to $6.06 million in 2019. This represents a 34.73% real increase during the 14 years.
A potential drawback of purchasing non-traded REITs are the high up-front fees. Investors can expect to pay fees, which include commission and fees, between 9 and 10% of the entire investment.
REIT | Forward dividend yield |
---|---|
Blackstone Mortgage Trust Inc. (BXMT) | 12.1% |
KKR Real Estate Finance Trust Inc. (KREF) | 13.5% |
Easterly Government Properties Inc. (DEA) | 8.3% |
Realty Income Corp. (O) | 5.5% |
This is the biggest and most important mistake that REIT investors keep on making. They see REITs as "income vehicles" and therefore, they will select their investments based on their dividend yield. In their mind, the higher the better. But in reality, the dividend is just a capital allocation decision.
In general, REITs are underperforming the real estate sector, which isn't exactly having the best year of its life either. Some REITs could be performing better than the sector, but dig into the company before you invest in it.
References
- https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook
- https://www.investopedia.com/articles/markets/102715/6-reits-pay-dividends-monthly.asp
- https://www.spglobal.com/spdji/en/documents/research/the-impact-of-rising-interest-rates-on-reits.pdf
- https://www.reit.com/news/blog/market-commentary/new-morningstar-analysis-shows-optimal-allocation-reits
- https://fnrpusa.com/blog/why-not-invest-in-reits/
- https://www.nasdaq.com/articles/heres-why-2024-could-be-great-for-reits:-4-stocks-to-buy-now
- https://turbotax.intuit.com/tax-tips/investments-and-taxes/tax-tips-for-real-estate-investment-trusts/L0tW3ad6C
- https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm26040
- https://www.morningstar.com/personal-finance/which-investments-keep-out-your-taxable-account
- https://www.investopedia.com/articles/investing/031915/what-are-risks-reits.asp
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-why-i-wouldnt-invest-in-reits-right-now/
- https://www.rocketmortgage.com/learn/reit
- https://www.investopedia.com/articles/investing/072314/investing-real-estate-versus-reits.asp
- https://www.reit.com/data-research/research/nareit-research/reits-2023-maintaining-solid-footing-amid-economic-uncertainty
- https://link.springer.com/article/10.1007/s11146-022-09892-2
- https://paperfree.com/en/magazine/why-warren-buffet-invest-in-real-estate
- https://www.reit.com/investing/reits-and-interest-rates
- https://www.investopedia.com/articles/mortgages-real-estate/10/real-estate-investment-trust-reit.asp
- https://www.cnbc.com/2023/08/11/mortgage-reits-may-be-a-soft-landing-winner-for-investors.html
- https://www.quora.com/How-can-you-lose-money-on-REITs-if-dividends-are-so-high-and-you-dont-plan-on-selling
- https://answerconnect.cch.com/document/arp286529ae447b6c1000815f001b7840a5b2019a/federal/irc/explanation/penalties-imposition-of-tax-for-failure-to-meet-the-95-percent-or-75-percent-gross-income-tests
- https://www.principalam.com/au/insights/real-estate/reit-annual-outlook-2024
- https://money.usnews.com/investing/articles/how-to-invest-when-interest-rates-are-cut
- https://www.institutionalinvestor.com/article/2bstrn5r5qzj5u96plla8/portfolio/reits-can-hedge-inflation-but-not-during-a-market-crisis
- https://www.wealthmanagement.com/alternative-investments/fund-managers-are-bullish-reits-2024
- https://www.ramseysolutions.com/retirement/real-estate-investment-trust
- https://money.usnews.com/investing/articles/best-high-yield-reits-to-buy
- https://www.nasdaq.com/articles/3-real-estate-stocks-that-could-make-you-a-millionaire
- https://www.investopedia.com/articles/investing/012816/basics-reinvesting-reit-dividends.asp
- https://therealdeal.com/new-york/2020/04/15/non-traded-reits-limit-withdrawals-amid-investor-rush-to-retrieve-cash/
- https://www.nasdaq.com/articles/how-much-money-should-you-have-in-the-stock-market-if-youre-75
- https://www.theglobeandmail.com/investing/markets/inside-the-market/article-office-reits-are-rallying-but-high-vacancies-are-still-a-threat/
- https://www.investopedia.com/terms/r/reit.asp
- https://smartasset.com/retirement/reit-in-roth-ira
- https://www.nasdaq.com/articles/what-does-reit-rebound-portend-for-2024
- https://canvasannuity.com/blog/safest-place-for-retirement-savings
- https://www.fitchratings.com/research/corporate-finance/us-real-estate-equity-reits-outlook-2024-13-12-2023
- https://www.realtymogul.com/knowledge-center/article/traded-vs-non-traded-reits
- https://www.forbes.com/sites/investor-hub/article/investing-in-reits-everything-you-need-to-know/
- https://www.bankrate.com/investing/reit-investing-mistakes-to-avoid/
- https://www.usatoday.com/story/money/columnist/krantz/2012/10/25/reit-real-estate-property/1637063/
- https://www.medicaleconomics.com/view/the-negative-outlook-on-reits-is-overblown
- https://www.investopedia.com/articles/mutual-funds/090516/landlord-vs-reits-pros-and-cons.asp
- https://www.doorloop.com/blog/reits-statistics
- https://www.reit.com/investing/investment-benefits-reits/reits-and-inflation-protection
- https://blog.massmutual.com/retiring-investing/reits-portfolio-invest
- https://www.nerdwallet.com/article/investing/reit-investing
- https://www.sofi.com/learn/content/reit-investing-pros-and-cons/
- https://groww.in/p/real-estate-investment-trust-reit
- https://www.investopedia.com/articles/investing/091615/are-reits-beneficial-during-highinterest-era.asp
- https://ersri.ewaycorphosting.com/node/1185
- https://smartasset.com/investing/how-much-to-invest-in-reits
- https://silveroaksecurities.com/wp-content/uploads/2020/01/REITs.pdf
- https://www.fool.com/investing/2023/07/02/you-cant-control-the-reit-bear-market-but-you-can/
- https://www.linkedin.com/pulse/do-millionaires-invest-real-estate-wealth-building-secret-ben-lovro
- https://www.classlawgroup.com/securities-fraud/investment/real-estate-investment-trusts/getting-out-of-a-non-traded-reit
- https://facet.com/investing/reit-investing-pros-and-cons/
- https://www.cnbc.com/select/what-to-know-about-reits/
- https://www.madisontrust.com/reits-and-debt-a-surprising-partnership/
- https://www.schwab.com/retirement-portfolio
- https://www.nasdaq.com/articles/5-top-performing-stocks-from-the-best-sectors-of-2023
- https://seekingalpha.com/article/4641210-warren-buffett-charlie-munger-reits
- https://smartasset.com/investing/reits-vs-stocks
- https://www.forbes.com/sites/forbesbusinesscouncil/2023/10/27/reits-an-investors-guide-to-real-estate-investment-trusts/
- https://www.financialpoise.com/the-reit-income-for-retirement-6-reasons-to-invest-in-reits/
- https://www.realized1031.com/blog/are-reits-a-good-investment-during-inflation
- https://www.simplysafedividends.com/world-of-dividends/posts/42-2023-monthly-dividend-stocks-list-all-66-ranked-and-analyzed
- https://www.fool.com/investing/2023/08/13/want-to-earn-passive-income-from-real-estate-but-d/
- https://manningleaver.com/resources/articles-alerts/real-estate-investment-trusts
- https://www.nasdaq.com/articles/these-3-stocks-have-made-warren-buffett-the-most-money-in-2023.-are-they-no-brainer-buys
- https://www.experian.com/blogs/ask-experian/pros-cons-investing-in-reits/
- https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-reits-close-2023-with-a-strong-q4-outperforming-the-broader-market-79928380
- https://seekingalpha.com/article/4642251-3-reit-stocks-that-pay-monthly-dividends
- https://www.pionline.com/interactive/reits-historically-perform-well-during-and-after-recessions
- https://smartasset.com/investing/reit-vs-real-estate
- https://money.cnn.com/retirement/guide/investing_basics.moneymag/index7.htm
- https://www.multihousingnews.com/2023-reit-dividend-yields/
- https://seekingalpha.com/article/4634124-what-i-wish-i-knew-before-investing-in-reits
- https://www.sec.gov/files/reits.pdf
- https://www.investopedia.com/financial-edge/0712/how-much-money-do-you-need-to-invest-in-real-estate.aspx
- https://1031ex.com/reit/learning-center/faqs/can-i-invest-in-reits-through-a-retirement-account/
- https://www.nuveen.com/en-us/insights/real-estate/tax-benefits-and-implications-for-reit-investors
- https://lyonswealth.com/blog-details/how-much-money-do-i-need-to-invest-to-make-3000
- https://www.morningstar.com/funds/role-real-estate-investments-portfolio
- https://www.financestrategists.com/retirement-planning/retirement-income-planning/should-i-use-a-reit-for-retirement-income/