Liquid Real Estate: The Power of REITs
Are you wanting to infiltrate the real estate market, but firmly lodged between a rock and a hard asset until you save up enough cash for that down payment? You may want to stick around and read about Real Estate Investment Trusts (REITs.) REITs can act as a liquid investment appendage to your real estate holdings or just a place to park funds for cash flow and easily retrieve them when you are ready to purchase your next big investment.
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To put it simply, a REIT is a paper investment that trades on the stock market. In fact, it’s right on the stock exchanges such as the NYSE and the NASDAQ. A REIT is a company, just like other public firms out there who sell stock, except these institutions own income real estate. These companies purchase real estate in the retail, residential, healthcare, office, and mortgage markets which convey that there are a large amount of options out there to fit any type of scenario imaginable. Check out dividend.com’s Top 217 REITs for information on dividend yields, pricing, and when the payout dates hit.
The soliloquy you may be opening with is “to REIT, or not to REIT…” Although we at AssetRover dig physical real estate because of the tax benefits and control (among many other reasons), and specialize in data-driven real estate investment search to help put more money in your pocket, REITs provide a number of enticing benefits of their own. In some cases, a REIT may be a handy paper asset option based on your particular financial situation or investment goals. See the top three benefits below:
As mentioned earlier, REITs give you the ability to buy and sell fractions of real estate investments on a short-term basis. A REIT can be scooped up as a mutual fund or an Exchange Traded Fund (ETF) which works just like a stock. If you want to buy and hold in hopes of capital gains, you can get in and out as quickly as your discount broker site lets you crush that buy and sell button. If you’d rather hold for dividends, keep that stock on lock for a quarter or more and reap those dividends as cash flow once they payout (keep reading!)
If you take a look at some REITs out there, you’ll notice that they pay out lofty dividends, sometimes 15% or more. Once your head stops spinning, gain your composure and keep in mind that the stock does often decrease in value by the amount of the dividend. For example, if your dividend is 50 cents a share, the equity (or value) of that company decreases by 50 cents a share as well. Market demand (or lack thereof) could affect that stock price on the opening day to either raise or lower the price of the stock, but the adjustment happens automatically. Despite this, dividends are an advantageous way for you to glean cash flow from your REIT investment. Be sure to purchase the stock before the ex-dividend date! The enticing story of dividends is the ability to “buy and hold” REITs much like an investment property. One caveat though…you should be keen on the fact that that you don’t get the depreciation and the breathtaking tax benefits achieved like you would with the physical asset.
REITs offer diversification in a couple of different ways. For starters, since you are investing in real estate holdings, you are likely to be in a different market than other stocks you may own, as well as the mutual funds in your 401k. On top of that, REIT companies typically invest in different real estate markets in various cities and often buy several property types, which help you diversify beyond real estate properties you already own. Split your bets and keep your nest eggs out of just one proverbial basket.
So there you have it! REITs are another investment gadget you can hook to your real estate tool belt as you raise capital for physical ownership or have short-term funds to invest. Despite the lack of tax benefits, the REIT can be a welcome addition to any investor’s profile. Some REIT returns may even beat out the S&P 500 in specific circumstances. It’s best to do your own research on the various finance websites out there to analyze REITs with blue-chip equity stocks to see which one is prevailing.
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Before you leave:Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties.
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