There are a number of reasons to invest in REITs. The following are some of the main characteristics that have attracted investors to REITs through the years.
A REIT is a company formed to use investors’ pooled funds to invest them in properties. In the process, they can qualify for certain tax advantages in the eyes of the IRS. To qualify as a REIT, the company must pay out to the investors in the form of dividends at least 90% of the money it makes in the form of dividends to the investors.
By avoiding taxation at the corporate level, REITs are able to pass on a greater portion of earnings to investors. This translates into potentially higher yields.
REITs are generally considered an “income play”; that is, because they’re required to pay out dividends, investors should expect to receive quarterly earnings in the form of a check. Investors also may reinvest dividends back into the REIT in order to purchase additional shares.
Diversification from Other Asset Classes
Most investors are familiar with the ups and downs of stocks, bonds, and mutual funds. The stock market is going to vary from day to day based on investor sentiment; political, economic, and social events; or any number of factors.
Real estate has its ups and downs, too, but it’s generally considered to operate independently of the stock market. For this reason, allocating a portion of an investor’s portfolio to real estate may make sense in terms of diversification.
Real Estate Investment Trusts (REITs) on Investor.gov, the U.S. Securities and Exchange Commission’s website.
Robert Gordon’s article, “How Are REIT Dividends Taxed?” on Investment News, dated October 2014.
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