One downside to building a portfolio of condos and houses is that when it comes to selling, the process isn’t exactly quick. Plus, there are significant costs involved so if you need money quickly, tieing it up in property probably isn’t the right option.
A REIT, or real estate investment trust, is a company that owns, operates, or finances income-producing real estate. They can either be private or public, with the publicly traded REIT being the more popular of the two.
– As previously mentioned, REITs must payout at least 90% of their income as dividends. As you can imagine, this is the main reason why investors put their money in them.– These large payouts will result in above-average yields, which is great for the dividend investor.– As opposed to owning physical property, REITs are more liquid as you only need to sell your shares to cash out.
– Unfortunately for those investing in REITs for income, there larger tax consequences. The federal government taxes dividends at a lower rate than ordinary income, but that dividend tax benefit doesn’t apply to REIT holdings.– Stock share prices can drop when property values fall.– Tax inefficient: When comparing REITs to rental properties, actively managed real estate is more tax efficient. Starting in the first year, they can take depreciation, which can lower their “income” with a non-cash expense.
Investing in real estate stocks allows busy professionals to reap the benefits of owning property without the hassles of being a landlord. It also allows a much lower amount of money to initially invest versus spending hundreds of thousands (or millions) buying a property.