Investing money in REITs will give investors many advantages. Simply explained, a REIT is a pool of money invested in real estate assets. It works similarly to a mutual fund, except instead of investing in a variety of publicly traded companies, it focuses on income-producing real estate assets. In this article you can find out 5 benefits of investing in REITs:
1. Taxes
REITs benefit from a huge tax advantage that goes hand in hand with the 90% payout rule. It means that REITs invest at least three-quarters of their assets in real estate and must distribute at least 90% of their taxable income to the investors. REITs don’t have to pay corporate tax if it fits these criteria. In addition, tax-free jurisdictions will attract investors, especially foreign investors.
2. Liquidity
The main reason why anyone would want to invest in REITs is for liquidity. Real estate is regarded as having a favorable risk-return profile. This means that it offers excellent profits while posing a lower risk of loss than other investments. However, real estate as an asset class has a major disadvantage: it is extremely illiquid. Investors who wish to sell their real estate investments must wait weeks, if not months, to do so. Investing in Real Estate Investment Trusts (REITs) can help in this situation.
3. Diversification
REIT investment gives you diversification in terms of property kinds, tenants, and locations. Common investors can diversify their holdings in listed real estate assets by using REITs to diversify their interests across multiple geographic locations and property specialities.
Real Estate Investment Trusts (REITs) offer a way to spread out the risk. This is due to the fact that it possesses a diverse range of assets. They own apartments, condos, offices, retail stores, and other buildings in a variety of markets. As a result, they have enough diversification to guard against the hazards that any single micro-market may provide. This is one of the reasons why REITs are so popular among investors.
4. Predictability
In contrast to other investments, Real Estate Investment Trusts offer a high level of predictability. REITs invest in real estate as their primary asset. Real estate has a fairly predictable rate of appreciation as well as a known rate of rental growth. As a result, the fund’s cash flows may be predicted with a high degree of accuracy and certainty. Year after year, the majority of US Real Estate Investment Trusts (REITs) meet analysts’ revenue and spending estimates.
5. Professional Management
REITs are managed by highly qualified professionals. As a result, they have methodologies in place and base their judgments on them. It’s extremely unusual that the administration of Real Estate Investment Trusts makes mistakes when it comes to property management. Individual investors would simply not be able to afford this expert management, never alone the enhanced income flow that it brings to the table. They may benefit from the financial and operational skills that many of these real estate investors bring to the table because they pool their money and each of them only has to pay a portion of the management charge.
Cons
Although there are benefits that you get if you invest in REITs, there is the other side of the coin. Like other investment instruments, REITs comes with risks that investors should be aware of. Here are some cons of REIT investment:
- Lack of control. When you invest in REITs, you have no control over the investment returns or how the company chooses to operate. The opposite tends to be true when you invest in a rental property – you are in charge and you make the decisions regarding the property.
- Fewer tax benefits. Although REITS don’t have to pay a corporate tax, most REIT dividends are taxed as typical income up to the maximum rate of 37%, which means you have to pay a decent chunk in taxes if your REITs are held in a non-tax-advantaged account.
The benefits of investing in REITs outweigh the risk for most investors. However, before adding any form of investment to your portfolio, make sure you understand what you’re getting into. The above-mentioned pros and cons of REITs investment can help you in making your investment decision.
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