facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Military Finances 101: What are REITs and how do they work? Thumbnail

Military Finances 101: What are REITs and how do they work?

Investment Managing Your Finances

Want to invest in commercial real estate without being an absentee landlord? Consider REITs, or real estate investment trusts. A REIT is an investment arrangement that finances, operates, or owns real estate that produces income for its investors. 

More than 80 million Americans invest in REITs either directly, through mutual funds or directly through exchange-traded funds.1 Institutional investors — pension funds, foundations, insurance companies, as well as banks — own a piece of the REIT action. They can also be a good choice for a military officer's protfolio.

Types of REITs

The most common publicly traded REITs are equity REITs. Equity REITs either own or operate real estate that produces income for investors. Next, there are mortgage REITs that finance income-producing real estate by originating or actually purchasing mortgages. Mortgage REITs earn income from the interest on those investments. 

Then there are public non-listed and private REITs. Public REITs do not trade on the stock exchange but are registered with the SEC. Private REITs are exempt from SEC registration, and their shares do not trade on the stock exchange.

In my opinion, a military officer should only consider publicly traded REITs.

Regardless of type, most REITs will pay out all — or at least 90 percent — of their taxable income as dividends to their stockholders. REIT shareholders must pay the income taxes on those dividends. However, under the Tax Cuts and Jobs Act (TCJA) the dividends from REITs can be considered as Qualified Business Income and 20% of the dividends are deductible.

How to Qualify as a REIT

The criteria for a company to be designated as a REIT are as follows:1

  • The company must be an entity taxed as a corporation and managed by a board of directors/trustees.
  • The company must have at least 100 shareholders with no more than 50 percent of its shares held by five or fewer investors.
  • At least 75 percent of the company’s assets must be invested in real estate.
  • At least 75 percent of the company’s income must come from rents, mortgage interest financing real property, or from real estate sales.
  • Shareholders must receive at least 90 percent of the company’s taxable income in the form of annual dividends.

Advantages of Investing in a REIT

REITs have a historically competitive return on investments. Those returns are based on a consistent, high dividend income as well as long-term capital appreciation.2 Those returns have a relatively low correlation with other portfolio assets, such as stocks. REIT investments can add stability to investment portfolios.

Liquidity and Transparency

In addition to substantial and stable dividend yields, REITs offer investors liquidity in trading on the stock exchange (for publicly traded REITs). Investors will also enjoy transparency as independent fund directors, auditors and analysts — along with financial media gurus — monitor REIT performance.

REIT for the Average Investor

So, REITs allow anyone to invest in commercial real estate using the same tools that they invest in other financial sectors. Investors can purchase stock of individual companies or through a mutual fund. Without actually having to go out and buy, manage, or engage in complicated financing deals, REIT investors can earn a share of the income produced in the high-value commercial real estate market.


1 https://www.reit.com/what-reit?gclid=CjwKCAiA45njBRBwEiwASnZT53cq6SYj3UKFZMUrc4U1CAcGXkQwLijs9BeQByoTQlOe02ABtz2PRxoCGb8QAvD_BwE

2 https://www.suredividend.com/high-yield-reits/

If you enjoyed this article, you might like the following blog posts:

Military Finances 101: SGLI


Military Finances 101: Retirement Accounts


Military Finances 101: The Insurance Triangle


This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.






Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.