In the past we have discussed passive real estate investing opportunities with a DST. Passive real estate investing allows you to capitalize on real estate without the headaches of property management.

Today we are going to bring your attention to another passive real estate investment opportunity with a history of solid returns. Wait for it …. the REIT. 

Let’s dive into the good and ugly of the REIT and if it’s a smart investment for you. 

What is a REIT?

If you are not familiar with a REIT,  it stands for Real Estate Investment Trusts. The concept is rather straightforward an investment company manages commercial real estate properties and pays out 90% of its taxable income to its shareholders in the form of dividends.  As a shareholder you pay income taxes on this revenue.

The income is typically generated from property rents that are dispersed among the company’s shareholders. 

How to Invest in REITs?

To become a shareholder can happen in a variety of ways as there are different kinds of REITs.

Most REITs are traded on major stock exchanges and can be entered into in the same way as buying any other stock, mutual fund, or EFT. 

Some of the publicly traded REITs include: iShares Dow Jones US Real Estate (IYR), Vanguard REIT Index ETF (VNQ), SPDR Dow Jones REIT (RWR), to name a few.

There are also private REITs and international REITs one could seek out, which may provide higher returns, like Vanguard's Global ex-U.S. Real Estate Index Fund ETF (VNQI). 

But as a general rule with investing the greater the return the higher the risk. 

An investor or financial advisor can guide you through the process and evaluate the quality of the investment opportunity. 

So How Well Do REITs Perform? 

REITs have a history of being lucrative, BUT are not immune to financial crises. Being a real estate investment let’s take a look at how it held up during the 2007 real estate bubble bust. 

During this time the publicly traded iShares Dow Jones US Real Estate ETF (IYR) dropped from $90.43 to $25.57 a share.  Nearly a 72% drop during the 2007-2009 real estate crisis. Clearly no investment is without risk, and not immune to financial crises. Today this same REIT has rebounded to 103.94 a share. As with any stock buying low is most advantageous.

So what does that look like in comparison to nowadays. During the challenges of this past year according to MSCI U.S. REIT Index, the 2021 5 year return on a REIT is currently at 7.58%, which has dropped by half from the 2020 return of 15.76%. This may present a good opportunity to buy low. 

Though it’s a hefty drop it remains a decent return when taking into account the economic difficulties of the passing year. 

Downside of REITs

Being a passive real estate investment it lacks the tax advantages of active property ownership. 

Additionally the dividend payouts don’t typically qualify as the lesser taxed “qualified dividends”, and are thereby taxed higher at your income tax rate. 

Conclusion 

REITs are another vehicle to jump into passive real estate investing. A qualified financial advisor can navigate you through deciding on if plunging into REITs is a good decision for your wealth building strategy.