Investing in REITs - Advantages and Disadvantages
REITs stand for Real Estate Investment Trusts. They represent an investment tool that provides high income. REITs are most often viewed as alternative to bonds.
REITs trade much like stocks on the major stock markets. However, they provide their holders the opportunity to take part in large-scale commercial real estate projects without having to invest large amounts of money in illiquid investments.
No corporate income tax is paid if the REIT passes 90% of their taxable income to shareholders.
The major target of REITs is large real estate projects. Some of the investments REITs may undertake include office complexes, hospitals, shopping centers and other commercial projects.
However, most REITs tend to specialize their trading and investing activities in one major project.
REITs are advantageous to investors in several ways.
First of all, REITs provide investors with income that is generated from rents. Additionally, the value of the REIT increases as the value of the real estate increases too. As a result the REITs share price will go up.
Since most of the relationships with tenants are based on long term lease agreements, REITs are a preferred investment solution since they provide a consistent stream of income. REITs are also beneficial since entering and exiting them is quite easy.
Finally, REITs give access to different large commercial real estate projects, which otherwise are out of average investors' reach.
One of the major drawbacks of REITs is their focus on one particular sector of real estate. A fall in this sector may lead to significant damages of the investors' money.
Therefore, when you make your mind on whether to invest in REITs you should approach them with some concern.
Another consideration you should make is the location of the project in which the REITs are investing. If there is a large concentration of construction activity in one particular area, then this area may experience a downturn in its performance.
So, we would recommend the investment in REITs that concentrate in different locations and real estate sectors. In this way you will manage to diversify your holdings and insure against potential falls in one sector or area.
Final Piece of Advice
Consider investing in REITs, because they will provide you with consistent stream of income. It is recommended that the percentage of REITs as part of your fixed-income portfolio should not exceed 25%.
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