In order to find the best REIT for your portfolio, there are a few factors you should look for. Among them are Dividends, Cost of capital, Taxes, and Transparency. Read on to find out more. Investing in real estate has been the best way to grow your portfolio while reducing your risk. In addition to that, REITs are a great way to diversify your portfolio.
Dividends
If you’re looking for a way to build wealth, REITs could be the answer. While ordinary stocks pay dividends to shareholders every quarter, these payments are taxed twice – once as ordinary income and again as a shareholder’s individual tax. Dividends from REITs, on the other hand, are tax-sheltered and are considered a separate source of income. This can translate into higher yields than from ordinary taxable companies.
The downside of REITs is that they have limited growth potential and less money to reinvest. They are their own worst enemy. While some of the dividends are taxed as ordinary income, most of them are taxed at a lower rate. Another downside to REITs is that their performance is tied to interest rate trends, which eat into REIT profits. Rising interest rates are generally unavoidable, but they tend to occur when the economy is strong enough to withstand them.
Cost of capital
A key measure of the cost of capital for REIT investing is the total return on equity. In general, REITs pay out approximately 90 percent of net income annually to shareholders. However, this percentage may be higher or lower than the real cost of capital. Investors price REIT shares for a 12 percent internal rate of return based on expected FFO, growth rates, and dividend yields. A high cost of equity capital can limit a REIT’s ability to achieve growth.
The calculation for the cost of equity is relatively straightforward. However, many REIT investors prefer to use a blended cost of equity and debt capital. This “weighted average cost of capital” can help them evaluate the wisdom of new investments. This metric also makes it easier to compare different REITs. Generally, the larger the ratio, the better. This measure is also useful in comparing REITs, as it can help determine which ones are more profitable.
Taxes
If you’re investing in real estate investment trusts, you may be wondering about the taxes you will face. The capital gains distributions you receive from REITs will be taxable to you as long-term gains. However, some REIT dividends will be treated as a return of capital. These dividends will reduce your cost basis in the REIT you invest in, which will result in a larger capital gain when you sell them later.
The IRS has listed some transactions that can have negative tax consequences for investors. Some of these are the sale of property held primarily for the purpose of selling it to a customer. These transactions will be taxable to you unless you have a separate entity with different ownership, which may result in an exemption. The following are some of the other tax-related risks that you may face:
Transparency
Investors looking for high performance should seek out REITs with greater transparency. While the benefits of transparency are many, REITs with less transparency often face a variety of disadvantages. For starters, the stock price of REITs with less transparency is likely to fall, which is bad for investors. It also has a negative effect on the company’s growth, as fewer investors will invest in companies that do not disclose their financial information. But despite the disadvantages of transparency, REITs with greater transparency may still have access to low cost of capital.
Another disadvantage of REIT investing is that investors have little information about the properties in their portfolio. They also have limited information about the company’s business structure and operations. Luckily, transparency is on the rise in the REIT industry. The SMARTCAP Group is one company offering complete transparency about its portfolio and properties. Its quarterly newsletters also give investors an overview of the company’s big decisions. By providing this level of transparency to investors, this REIT is one of the most popular forms of real estate investment. It provides diversification without negatively impacting returns.
Returns
Diversification is a key feature of REIT investing. While stocks and REITs have very little correlation to each other, they do march to different drummers. Generally, real estate and REITs tend to grow more rapidly during times of economic growth and fall during slower economic times. Hence, they can provide a more steady stream of income. However, they are not as liquid as real estate properties, which are harder to buy and sell.
In terms of risk, an investor can invest in an REIT. The risks are lower than those associated with an index fund. Besides, a REIT offers a diversified portfolio that diversifies assets, which allows for lower risk and higher return. However, investors cannot control the properties in REITs. This means that the management team has more control over the properties. This can lead to some bias in the returns. Therefore, it is essential to carefully select the right REIT for you.
