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The current cultural and political chaos gripping the world, the pandemic-destabilized jobs market, and the volatile US economy has many Americans on the lookout for new ways to establish their financial security and independence.
Whether they’re interested in diversifying their current investment portfolio or searching for a whole new career path, many of the financially savvy are looking to real estate investment trusts as the answer.
REITs, or real estate investment trusts, are companies that own, operate or finance income-producing real estate, which can include income-producing land as well as income-producing buildings.
Let’s take a look at the factors you need to consider when determining whether or not a real investment trust is the right career path for you.
When you start investigating available opportunities to invest your finances and your future, you first need to look at the historical performance of those opportunities.
REITs have a long 45-year history of providing significant and reliable dividends to their investors and have outperformed other investment options over the past 20 years, including the S&P 500 Index.
REITs also have a positive legislative track record, with innovations over the past 60 years that have strengthened and improved the investment opportunities that REITs offer to millions of investors.
As the most recent example, the Tax Cuts and Jobs Act of 2017 (TCJA) reduced taxes on REIT dividends by 20% for individual investors with taxable incomes below $157,000 (or $315,000 for joint filers). Partial tax benefits are also available on REIT dividends to individual investors with taxable incomes of up to $207,000 ($415,000 for joint filers).
The combined upward trajectory of solid REIT dividends and positive legislation activity are both great signs that REITS will continue to provide financial stability for their investors in 2021.
One debate real estate investors face is whether to put their money into a REIT or to invest directly in the market by purchasing real estate themselves. Both options come with benefits and drawbacks.
The staid stability of REITs is a turn-off for some investors excited by the unexpected real estate boom of 2020. Looking at the S&P/Case-Shiller Home Price Indexes as of April 2021, that meteoric is still sharply ascending.
According to the latest, non-seasonally adjusted national index, home prices saw an 11.9% year-over-year increase.
That’s quite a draw to go into direct property investment. Direct real estate investing puts full control of all property sales, purchases, and rental agreements solely in your hands – along with all of the direct rental and property sale profits.
It also puts sole responsibility on you, too. You’ll need to secure the funding for every single property purchase. If you choose to invest in rental properties, you’ll need to find and vet all tenants, collect the rent and maintain the properties, or pay a property management company to handle all of these details for you.
Some of the benefits of REITs include:
Liquidity: REITs have better liquidity than direct property investment because shares are traded on the stock exchange, unlike property which takes time to buy and sell on the open market.
Transparency: REITs that are publicly traded on the stock exchange must register with the SEC and are required to disclose financial information to their investors.
Diversification: REITs invest in a massive portfolio of properties that minimize the financial hit when disaster strikes, such as an anchor store pulling out of a retail property. REITs can also afford to employ economic experts to anticipate and mitigate damage from financial crises such as the 2008 crash by diversifying property holdings in advance.
Dividends: REITs offer investors some of the highest dividends around as regulations require that, “REITs must distribute at least 90 percent of their taxable income to shareholders as dividends.”
REIT investing does have its drawbacks.
Lack of control: You have little to no say over how the money you invest into a REIT is spent, which properties are purchased and sold, or other financial moves your REIT might make. You really only have control over putting money in and taking it out of a REIT.
Investment risk: REITs are lower risk than direct property investing, but they are not risk-free. While REITs have a history of growth, they can lose value as interest rates rise, which can put your overall investment at risk.
Lack of arms-length transactions: Major players in the REIT world have crowded out the small investor in recent years, which has put a handful of REIT managers in the decision-making seat for multiple trusts. Some of these managers are known to conduct transactions between REITs that they control, which removes the arms-length transaction aspect that guarantees their investors a fair sales or purchase price.
Management fees: REITs don’t run themselves. They require management that their investors pay for out of their profits and investments. Before investing, you need to research your REITs management fees so that you don’t end up paying too much.
While there are specialty REITs or hybrid REITs that invest in multiple REIT sectors at once, the majority stick to one market sector. Each sector comes with its own set of risks and rewards, so it’s important to investigate before you pick a REIT for your investment.
Retail REITs: These REITs invest in properties that house retail stores, including shopping centers, regional malls, and outlet centers. The pandemic-related shift from brick-and-mortar stores to online shopping had a negative impact on these REITs in 2020, but they are rebounding in 2021.
Lodging/Resort REITs: These REITs that invest in hotels, motels, and vacation resorts rely heavily on tourism for their rental—which took a financial hit in 2020. Things are looking up for Lodging REITs in 2021 as the world opens back up and travelers are stir-crazy from lockdowns
Healthcare REITs: These REITs invest in healthcare-related real estate, such as hospitals, nursing homes, and health clinics. They surprisingly took a nosedive during the pandemic as lockdowns shut down any non-Covid-related healthcare, such as elective surgeries. Healthcare REITs are looking good in 2021 as long-term investments.
Industrial REITs: These REITs invest in industrial facilities, including distribution centers, warehouses, and pharmaceutical labs. The properties that industrial REITs invest in are essential to almost every kind of industry, making them more resistant to economic downturns. The financial stability of industrial REITs looks to continue throughout 2021.
Income-producing land REITs: Falling under the umbrella of specialty REITs, these income-producing land REITs make money from goods produced on the land, rather than from building rental incomes. While not an official sector, some income-producing land REITs, which include farmland REITs, are a solid investment for 2021. Timber REITs are on fire for 2021 due to lumber prices skyrocketing by 232%.
Directly investing your own savings into a REIT isn’t the only way to profit from these types of companies – you can also build a sizable and secure financial future by working for a REIT.
Remember those management fees you’ll pay out as a REIT investor? Depending on the structure of the REIT you choose to work for, as a REIT fund manager you may simply be on the company’s payroll, or you might be paid a base salary and receive a percentage of the total trust assets as part of your compensation.
Working with an investment firm will sometimes let you learn about the real estate industry as you have the opportunity to network with investors, qualify investment deals, and work to grow the investment portfolio by finding properties for the REIT to invest in.
REITs are just another tool investors can use to diversify their investment portfolio or get into the industry. Whether you’re investing your savings or investing your future in an REIT career – there are many paths one can take.
If your goal is to learn more about the real estate industry from the inside out, working with an investment firm may not be a bad option but may require much more experience than you have. Or may just not be what you are looking for. Before committing to an REIT, you should consider alternatives.
New Western hires motivated individuals looking to start their careers. We are consistently looking for people to join our team all over the nation. We whole-heartedly believe in progressing agents from within the organization to management positions as they learn more about the industry and build skills.
When you join a company that’s changing the game of real estate investing, opportunity follows. We’re experiencing unprecedented growth and need more motivated people to help us improve our communities one neighborhood at a time. We have a track record of promoting from within and our agents typically earn more in commissions than their peers working in traditional real estate brokerages. You’ll find at New Western, hard work never goes unnoticed or unrewarded.
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