The thought of investing in real estate may be appealing to you; the thought of owning a second home or becoming a landlord, however, may sound like a major headache. What can an investor do to solve this paradox? Consider investing in an REIT, which provides an alternative approach to real estate that doesn’t require you to actually pour your money into a single, physical property.
But what is an REIT? Those letters stand for real estate investment trust, and this investment asset works in much the same way as a stock. Like a stock, you can invest in an REIT on a major stock exchange, but the difference is the REIT invests directly into real estate, sometimes through properties and sometimes through mortgages. This makes for a relatively simple way for investors to add real estate assets to their portfolio, and there are some tax advantages to consider, as well.
While REITs come with many pros, they also come with some drawbacks. Simply put, this is not the right investment for everyone, and we urge you speak with a financial advisor before adding REITs to your portfolio.
The Good and the Bad of REITs
As you begin to think about this particular investment asset, though, you might begin by weighing some of the pros and cons. A few potential advantages worth noting include:
REITs do not pay corporate tax at the federal level, and they can declare capital gain dividends to pass through capital gains at the sale of a particular property.
They are highly liquid, trading on established securities changes. In other words, buying and selling REITs is about as easy as buying and selling stocks.
If you have never invested in real estate, this is simply a good way to diversify your portfolio.
Most REITs are internally managed by seasoned real estate professionals.
With that said, there are also some potential drawbacks to note:
To qualify as an REIT, there are a number of restrictions and requirements that must be satisfied, so REITs are not as flexible as typical corporations or partnerships.
A REIT cannot pass losses through to its shareholders.
Finally, many states impose taxes on REIT dividends.
Again, it is important to speak with a financial advisor before you make any final decision about adding REITs to your portfolio—and we invite you to contact the Stonepath Wealth Management team today. We are happy to schedule a consultation at your convenience.
Disclaimer: Diversification and asset allocation strategies do not assure profit or protect against loss.