Choosing where and how to invest your money can be difficult, particularly if you are new to investing or have only limited experience. How can you know which real estate investments will match your risk comfort level and earn you a good return that makes your investment worthwhile?
At Addition Financial, we always want our members to have the information and support they need as they invest in their futures. REIT investing is something that allows investors to earn passive income by investing in residential or commercial real estate. To help you understand whether investing in the real estate market is right for you, here’s our overview of REIT investing for beginners.
A Real Estate Investment Trust or REIT is an investment vehicle that allows individuals to invest in real estate trusts of income-generating properties. People who may not have enough money to invest in real estate directly by purchasing properties to rent can take advantage of the financial benefits of real estate ownership by purchasing shares in REITs.
A lot of Americans have put some of their investment funds into REITs. There are approximately 150 million people in total living in households that have invested in REITs. People may purchase REIT shares through mutual funds, exchange-traded funds (EFTs) and by purchasing company shares directly. There are over 225 publicly traded REITs in the United States, with a combined market capitalization of more than $1 trillion.
REITs are income-producing investments, giving them a lot in common with dividend stocks. By law, REITs are required to pay out 90% of their taxable income to their shareholders in the form of dividends. Income may be earned by renting the properties financed and/or owned by the REIT.
Most REITs are traded on public stock exchanges, something that makes them far easier to buy than real estate. They’re accessible to investors at every level.
As stated above, REITs pay dividends. Legally they are required to pay dividends once every year, but many REITs pay them on a monthly or quarterly basis. As a result, REITs are a better source of passive income than they are of long-term gains. With only 10% of taxable income available to reinvest, REITs don’t have the same growth potential as other investments.
Before you add REITs to your investment portfolio, you should understand how REITs are classified. Here are the primary types of REITs:
There are some other classifications that may apply to REITs, as follows:
Most individual investors purchase shares of publicly traded equity REITs. REIT shares may be purchased on the exchange directly, through a broker, or through a retirement account such as a 401(k) or an IRA.
Historically, REITs have proven to be a good investment. While payouts can and do fluctuate from year to year, the data shows that over time, REITs have outperformed the S & P 500 index. In fact, over the past 20 years, REITs have earned an average return of 12.7% compared to just 9.5% for the S & P 500.
The type of REIT you invest in will impact how much money you earn from your investment. Here are the average returns for REITs based on the real estate properties they contain:
Only diversified REITs and REITs of resort properties underperformed the S & P 500, so you should keep that in mind when choosing your investments.
93% of all target date funds, including most retirement plans, have REIT allocations. If you have a 401(k) or an IRA, you can choose to invest in REITs as part of your retirement planning. 83% of financial advisors recommend REIT investments to their clients because of their steady returns.
You have several options if you want to purchase REIT shares. The first is to buy the shares directly on the stock exchange. Examples of publicly traded REITs that have performed well include the following:
Another way to purchase REITs is to do so through REIT mutual funds or EFTs.
Asset allocation is an important part of choosing investments. As a rule, you want to limit high-risk investments. Younger investors can generally afford to take more risks compared to those who are close to retirement age because they’ll have time to recoup any losses before they retire.
Most experts advise making REITs between 5% and 15% of your investment portfolio unless you are planning to retire soon. Beginning investors with 40 or more years to go until retirement can go as high as 18% if they choose. Those who are approaching retirement may want to decrease their REIT allocation to 3% at retirement.
Keep in mind that REITs are a better source of ongoing passive income than they are of long-term growth. Keeping some REIT shares in your portfolio after retirement may provide a supplement to your other retirement income.
Now, let’s review the pros and cons of investing in REITs.
If you’re just starting out as an investor, adding REITs to your portfolio can help with diversification while providing a source of passive income. The information we’ve provided here can help you make the right choices for your portfolio and eventual retirement.
Do you need assistance choosing investments for your portfolio? Addition Financial is here to help! Click here to read about our MEMBERS Financial Services program and book an appointment with a Financial Professional today.