What Makes a REIT a Good Investment?
Real estate appeals to most everyone because it provides tangible asset that can be seen and touched (as opposed to stock or ETFs which can provide with an abstract sense of ownership). But not everyone is made to be a real estate investor, and certainly not a hands-on landlord.
For a little background, remember there are three main types of REITs:
- Public, Exchange-Traded REITs
- Private REITs
- Public, Non-Traded REITs
The Top 3 Reasons Real Estate Investment Trusts are SO Great:
1. Those Super Rich Dividends
Let’s get real. Real Estate Investment Trusts (REITs) are best known for their dividends and some high-dividend ones pay significantly more than average. This makes them especially compelling for investors looking for returns in a down market, but also even in a rising market, as this investment can rise even faster than a rising stock market.
According to the Securities and Exchange Commission (SEC):
“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% of its taxable income to shareholders annually in the form of dividends.”
2. Truly Passive Income Real Estate
Passive income is defined as earnings for which a person is not actively involved. Traditional real estate investing (owning, managing, and maintaining properties) is an actively managed asset.
Again–back to the individual investor, who may or may not have the kind of time it take to invest in real estate, hands-on style. It takes time, persistence and grit to build a solid real estate portfolio. Leaving it to the experts is one way to tackle this.
3. The 90% Rule (for the 99%)
As shown in the SEC definition above, REITs dividends are substantially higher than other investments because they are required to distribute at least 90 percent of their taxable income to their shareholders annually. The dividends are based on a (hopefully) stable stream of rents paid by tenants of the properties owned by the firm.
This 90% Rule is for every shareholder invested, not depending on how much you have invested, so if you are not part of the upper 1% in net worth, not to worry. You also do not need to prove you have Accredited Investor status.
Because these companies are required to pay at least 90% of taxable income back to their shareholders, investing in REITs can be a remarkable strategy for passive income for retirees and most everyone. But there are some gotchas to be aware of.
4 Gotchas to Watch Out Before Investing
1. The Non-Traded Kind
What is a Non-Traded REIT?
Many investors, especially novice ones, think that real estate is a safer and more lucrative investment than equities–but this is a common misconception that is not necessarily true. Many unsuspecting investors have invested in inappropriate investments: non-traded real estate investment trusts.
Companies offering Non-traded REITs make it very hard for securities firms and regulatory agencies to monitor them. They are typically offered privately to investors until enough capital is raised to begin or continue operations, and are not traded on any public securities exchanges.
FINRA Arbitration Attorneys Oakes and Fosher, LLC, out of St Louis, MO, have a basic, easy-to-understand, 5-minute video about non-traded Real Estate Investment Trusts and what to watch out for here. IF you are a victim of REIT fraud, contact this firm or attorneys in your state.
2. High Dividend Yield: The Shiny New Object
You need to study more than the YIELD for a REIT when making a passive income investment. You need to uncover and understand the stats that give you insight into a REIT’s financial health and therefore how likely it is to provide you with a predictable dividend each month or year (yes, some REITS pay out monthly, though–how’s that for paying the bills?)
3. Past Performance Does Not Indicate…
You know the drill. Past Performance is just that, and REIT dividend payments are far from guaranteed. Also, REIT accounting rules should be understood as it has an impact on all REIT investment decisions.
4. Taking It Into Account(ing)
Going back the SEC definition, it states that “must distribute at least 90% of its taxable income.” But what is Taxable Income in this case?
A Real Estate Investment Trust’s dividend distribution is not based on EARNINGS, but is part of the company’s cash flow statement. A cash flow statement basically outlines how much money a company earns and where it all goes. In the case of REITs, dividends are shown on the Cash Flow statement, so Earnings can include different accounting rules.
One of the most important rules within this context is Depreciation, which is included in the income statement as a cost of doing business even though it doesn’t affect a company’s cash. For example, note that if you remove depreciation, many REIT companies that don’t have any earnings are technically making money.
Note that some Real Estate Investment Trust companies do have exposure to real estate, but do not generate the bulk of their business from property-related ventures. Be sure to separate out these firms while doing your research, and decide if they are suitable for your investment needs.
How to Seek Out Potential Dividend Growth
Many Real Estate Investment Trusts are super attractive because of their rich yields, and it’s tempting to look no further than that. A firm’s ability to deliver exceptional dividend growth. Independent investment research firm BCA Research forecast REIT dividends rising by 10%, on average, in 2022.
Check these important factors out before considering the purchase of a REIT:
- Market value
- Dividend yield
Calculating a REIT’s dividend yield is similar to other investments. The annual distributions per share are divided by the current share price of the Real Estate Investment Trust, expressed as a percentage.
- TTM dividend growth
This number represents the growth percentage between two quarters of TTM dividends calculation.
Where Are REITs Headed Now?
As mentioned above, the independent investment research firm BCA Research forecasts that REIT dividends could rise by 10% on average in 2022.
According to Motley Fool, “Medical Properties Trust, Iron Mountain, and VICI Properties all have well-covered payout ratios and are expected to increase revenue in the coming years. These three high-dividend Real Estate Investment Trusts should provide long-term income and price growth for investors.”
There are many Real Estate Investment Trust research firms available to the investor, like Morningstar and other objective investment sites.
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Disclaimer: All the information provided above and on this site is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.
Remember, past performance is not a guarantee or indication of future performance. Any investment involves the risk of loss.