Gold, Silver, Bitcoin
With the limited supply of real estate available across most of the country, investors should consider the addition of REITs to their investment portfolio. Real Estate Investment Trusts are said to be one of the best financial strategies for 2016. They are a relatively stable investment, which is especially important in 2016 because many insiders are predicting a recession.
How It Works
An REIT is similar to a mutual fund. Investors acquire ownership in real estate. The real estate is generally commercial buildings such as office buildings, hotels, shopping malls, apartment complexes or hospitals. Sometimes the investors also operate the business, while other times they lease the building, and the businesses are run by other companies. Every REIT is required to have a minimum of 100 shareholders, and no more than 50 percent of the shares may be owned by any five shareholders. A minimum of 75 percent of the REIT’s assets are required to be invested in cash, U.S. Treasurys or real estate, and they must earn at least 75 percent of the REIT’s gross income from real estate.
One of the best reasons to invest in REITs is that they are required by U.S. law to maintain dividend payout ratios of a minimum of 90 percent. The REITs can deduct the dividends it pays out to avoid most tax liabilities. However, investors are required to pay individual income taxes on all of the money they receive from payouts. Many REITs are set up with dividend reinvestment plans. These are known as DRIPs, and they allow the returns from the REIT to compound over time.
Pros and Cons
Diversification is key in any investment portfolio, and real estate is great for adding diversity because it doesn’t necessarily correlate with stock prices. Your REITs are likely to do well when your stocks are sliding, and your stocks may do well when your REITs are sliding. Having both makes your portfolio more stable over time. Another benefit to using REITs as an investment strategy is that the trust owns physical assets. Most physical assets appreciate over time, even if the overall market is doing poorly.
It is important to note that each REIT will have different properties in its portfolio. As an investor, it is imperative that you research the properties you are investing in. It is also important to note that the tax rates on REIT earnings can vary, so contacting your accountant before investing to find out the potential effect the investment will have on your taxes is a smart move.
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