REITs and Wealth Building
November 21, 2015
Paul Ohanian
Founder and CEO, Scottsdale Wealth Planning, Inc.
In previous issues of the Journal, I’ve discussed the basics of Real Estate Investment Trusts (“REITs”) and their role in providing asset diversification and lessening general stock market exposure in a portfolio. In this issue, I would like to explore REITs as a tool for building wealth as a liquid and flexible alternative to directly holding real property. For a similar investment cost, both assets can be sources of regular, steady net income; both can be leveraged for future real estate purchases; both assets can be affected by the cyclical nature of real estate, appreciating (or declining) in value.
The structure of a REIT allows an investor to participate in a pool of professionally managed real estate investments. Professional management relieves an investor of several direct expenses and responsibilities usually associated with a rental property (including property maintenance and handling tenants). Professional management can also leverage the REIT for a greater return on investment, saving an investor the time and effort (and financial liability) of applying for a mortgage.
A well done REIT investment functions similar to a rental property; it provides the investor with a steady, reliable cash flow. Special tax considerations compel REITs to distribute more than 90 percent of net income, which is generated by collecting rent and/or interest on mortgage loans of the managed pool. For many REITs, this means regular, often monthly, dividend payments to investors. Much like rental income, dividends can be distributed as cash or applied toward purchase of a new REIT investment to, in turn, produce more income. Unlike much rental income, REIT dividends are issued as net income, the expenses associated with the REIT having already been paid prior to distribution.
REITs are sold as undivided interests – often shares – and many are traded on public exchanges (like the NYSE) alongside stocks and bonds, which can be affected by market volatility not directly related to real estate. In spite of being psychologically challenging to investors who aren’t accustomed to watching real estate values rise and fall – sometimes dramatically – in real time, an advantage to the REIT investor lies in the liquidity of the asset, the ability to buy or sell quickly at an agreeable price.
If you are considering a wealth building strategy based on real estate investments, you may consider REITs as a liquid and flexible alternative to directly holding an investment property.
Information contained in this article is for informational purposes only and should not be considered investment advice. Advice may only be provided after entering into an advisory agreement with Scottsdale Wealth Planning. Information is at a period in time and subject to change. Scottsdale Wealth Planning’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.