What you may not have known about real estate investment trusts (REITs) for passive income. Linda Richardson, a New Jersey-based financial content writer and guest writer, opines.
Thanks to the coronavirus, the recession has officially hit the world economy. Real estate investment trusts (REITs) have suffered very hard. REITs are appealing to retirees. But are they lucrative and reliable investment options in the US?
What is a REIT?
A real estate investment trust (REIT) is a type of investment vehicle that allows anyone to invest in real estate without owning physical properties. It allows investors to generate a passive income stream in the form of dividends and hopeful capital gains. There is no need to buy a property and block a huge amount of capital. As the name suggests, the trust owns and manages various types of properties in the US (retail, commercial, residential, etc.). A few examples a trust can own and manage are hospitals, shopping malls, apartment complexes, data centers, retail outlets, offices, hotels, and so on.
When you buy a REIT stock, you own a tiny portion of the real estate properties owned by the trust. The rent collected from these properties is then distributed to all the shareholders in the form of dividends. As required by law, REITs have to distribute at least 90% of its income to shareholders. Shareholders can then make great profits and reap the rewards. Investing in REITs is one of the smartest money moves to make in your 20s. REITs have many benefits.
Benefits of REITs
REITs are tax-efficient. They do not have to pay corporate taxes to the government. This is good news for investors because they [REITs] can distribute those savings to investors. REIT investors are required to pay taxes on the dividends or any capital gain earnings. Also, when you invest in REITs, you don't have to perform property maintenance or deal with unruly tenants. The trust does all the heavy lifting. REITs also afford investors great returns.
Over the last 2 decades, REITs have provided better returns than corporate bonds. Overall return is higher than the S&P 500. Since May 1996, the Vanguard Real Estate ETF (VNQ) has yielded superior returns than the S&P 500. As with with regular or common stocks, investing in REITs has risks and companies sometimes increase or decrease dividend payments when they start facing capital issues.
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What is the minimum amount that you have to invest?
You don't need to have a lot of money to invest in REITs. Congress created REITs as an investment vehicle to allow the regular person to invest in real estate with very little capital. You can start your journey as a REIT investor with as little or as much money as you want to. You only need to have enough money to buy at least a share of a REIT stock or REIT ETF. Some REITs are more expensive than others. Retired individuals and those who want to enjoy a passive income stream are the ideal candidates for REIT investments.
The bottom line
Have you ever dreamt of buying a hotel or a shopping mall or data center?
REIT investment allows Americans to extend the periphery of their dreams. It allows them to invest in and own real estate properties that are beyond their affordability and generate a passive income stream and grow their 'money tree' gradually. With the right selections, REIT investments can be a reliable source of passive income stream.