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Five Reasons to Add This Income Investment to Your PortfolioBy
Friday, January 5, 2018
I've been investing in real estate for a very long time... from the home I live in, to property companies, to physical real estate.
But some of my favorite real estate investments are real estate investment trusts (REITs).
REITs were created back in 1960 to allow everyday investors to earn income on large real estate portfolios.
Today, I'll explain why you should take advantage of them...
A REIT is a company that owns a portfolio of income-generating real estate. The types of properties vary hugely – they can be commercial, retail, residential, or industrial, and can even include hotels, hospitals, and forestry.
Today, I'm going to focus on REITs that own brick-and-mortar real estate – also known as equity REITs.
You should own equity REITs for lots of good reasons. But in particular, they help you do five key things...
1. Earn income.
By law, REITs have to pay out nearly all of their taxable income to shareholders in the form of dividends. While the percentage that must be paid out varies, it's usually at least 90%.
These REIT dividends are all backed by rents. A REIT owns (and often manages) portfolios of underlying real estate. It collects the rent and pays out nearly all of that income to you.
In Asia-Pacific, some REITs pay 5%-7% or more in dividends. This is attractive in a world of persistently low interest rates.
2. Make tax-efficient investments.
When you invest in regular stocks, by the time you get that dividend cash into your brokerage account, it has been heavily taxed.
Dividend income from regular listed companies is taxed twice. Firstly, it is taxed at the company-earnings (or profits) level.
The second level is taxing the dividend itself, which, depending on your circumstances, can be up to 20%.
But REITs only get taxed at one level, depending on the REIT jurisdiction. Most of the time, this means that their income is tax exempt, so long as they pay a minimum of 90% of their profits to shareholders. In other markets, the dividends that investors receive are tax exempt, if the REIT has paid tax on its income.
Either way, this makes REITs much more efficient for us as investors... We only get taxed once.
3. Be a landlord without the stress.
I am a huge advocate for owning investment real estate. But between deadbeat tenants who cause damage or don't pay rent, the costs of renovations and refurbishments, and midnight phone calls about clogged sinks... being a landlord has a lot of downsides.
REITs allow you to own a portfolio of rent-generating real estate – without having to deal with any of the aggravations that can accompany being an individual landlord. None of the tenants from your REIT portfolio will be calling you at 4 a.m. on a Sunday morning after a kitchen pipe has burst.
4. Own the best real estate.
As individuals, it's unlikely any of us will ever be able to buy a prime downtown office building or a high-end mall in New York or Tokyo.
But REITs allow us access to some incredible real estate that we'd otherwise have no chance of ever owning ourselves.
For example, if you do some research and come to the conclusion that you like the Singapore office market or the U.S. industrial market, you can take a position in these markets by buying a REIT. Because most REITs focus on one kind of real estate – and sometimes in one city – it gives investors the opportunity to take a position in that market for a small amount of money.
5. Add some predictability to your portfolio.
Rental income and property-management costs are relatively predictable over the short to medium term. That means as investors, our income outlook is stable... We don't need to worry too much about earnings, unlike with our normal equities.
REITs also exhibit low beta. Beta measures volatility, or how much a particular security moves around in relation to the broader market.
For example, a stock with a beta of 1.0 indicates that the price moves in line with the market, up and down. If the beta is more than 1.0, it implies the stock moves more than that market (in both directions). And if the beta is less than 1.0, it means a stock moves with less volatility than the market.
REITs generally have a beta of less than 1.0.
This means that while REIT prices won't move up as quickly as the market does, when the market corrects, REIT prices should also fall less than the market.
If you think of a risk spectrum, with bonds at one end and equities at the other, REITs occupy the middle ground. While a bond gives you a certainty of getting your capital back, it lacks capital growth. REITs allow you the opportunity to enjoy capital growth and dividend growth because real estate's value and rents tend to increase over the longer term.
So if you're looking for relatively high, predictable, stable income, backed by real assets, then REITs should be a part of your portfolio.
Good investing,
Further Reading:
"Adding real estate is one of the easiest ways to boost your income as we head into 2018," Peter says. That's because most investors don't own enough of it... Learn more here: Here's Why You Should Own More Real Estate Next Year.
"If you want to be successful in real estate investing, you absolutely must get one thing right," Peter writes. He's talking about location... and it has a huge impact on pricing. Read his five tips for understanding it right here: The Single Most Important Rule for Buying Investment Real Estate.
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Rio Tinto (RIO) is one of the largest metals and mining corporations in the world. It produces copper, iron ore, aluminum, uranium, and more. Rio Tinto drew in about $34 billion in revenue in 2016, with $7 billion in gross profit. But rewarding shareholders is where this company really shines... During the last year, it announced $8.2 billion in cash returns to shareholders – including $4.2 billion in dividends. And just last week, it launched a new share-buyback program of nearly $2 billion.
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