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Understanding the Value of REIT’S

Donny Gamble
January 22, 2022
what is a REIT
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Real estate investing is an entirely separate world from stock investments and IRAs. The differences are so great that you’ll rarely find investors who have their toes in both pools, so to speak.

What is an REIT? It stands for real estate investment trust, and it’s an investment method that allows you to invest your money in a commercial property management company. These companies buy and renovate structures, then rent them out to corporate, commercial, or private residences (though the latter is rare).

When you invest in an REIT, you’re not actually responsible for the property in the trust; you’re basically backing capital for the company or companies to purchase, renovate, and rent out property to others.

You don’t have to pick up a sledgehammer; you just collect dividends.  You can invest in an REIT similarly to a stock, though we’ll get into that in more detail a little bit later.

This long-term investment strategy has some more facets to it that you need to understand before throwing you money in the pile.

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2 Main REIT Types

Choosing between the two is a fairly big deal. Each have their benefits and drawbacks.

  • Publicly Traded REIT: These tend to be established companies that are traded on the open market, meaning you can liquidate your stocks if need be (more on this later). In short, it’s more accessible and doesn’t require an “in” to get started like a non-publicly traded REIT does.
  • Non-Publicly Traded REIT: These are still regulated by the SEC, they’re just not available for public trading. This can be beneficial if you’re looking to control a larger share of a smaller REIT company, or if you want to get in on the ground floor of an investment opportunity that doesn’t require as much upfront capital. The larger the REIT, the more you’ll need to invest to get a sufficient return. If you’re there in the beginning, the world’s your oyster.

A Liquidation Problem Between Publicly Traded & Non-Publicly Traded REITs

One major point that you need to keep in mind is financial stability. The benefit to publicly traded REITs is that at any point, similarly to a stock, you can liquidate that asset and use the funds to support your way of life or counter sudden and tragic life events.

When you’re locked in to a non-publicly traded REIT, there’s no way to really get out without a lot of work. It’s not as simple as firing up your preferred stock trading app and selling your stock.

This liquidation problem is perhaps the biggest difference between choosing which investment type is right for you. For some, investing is a passion and something that an individual is willing to throw everything into while living below their means (not the worst idea, by the way).

For others, it’s a way to supplement income or begin building wealth. Either way, nobody is immune to difficult life struggles cropping up out of nowhere; it has the possibility of happening to everyone.

Can you handle a crisis without liquidating your investment? If not, choosing a publicly-traded REIT may be the better option.

REITs Are Excellent Long-Term Investment Strategies

If you’re looking to fund your retirement account, and you don’t want to go the route of a precious metals IRA, and you don’t want to bother with flipping properties on your own, a REIT is the middle-of-the-road option.

Because income from REITs is tax-complex, this investment strategy is best suited to a retirement account. However, there’s a way to play both sides of the fence on this one.

If you go with a publicly traded REIT, you can invest in one and set it up through an IRA firm or a self-directed IRA, and you can invest in another REIT with the goal of receiving profit to reinvest with.

This way, you get the benefits of your retirement account being funded (which is tax deferred), and you can earn an income and reinvest with the hopes of retiring early and still having that fund waiting at 59 ½ years of age.

Tax Information About Investing in REITs

Tax information for REITs is going to change in 2026, but until then, you can expect an average of sub-30% taxation on REITs. You can get tax deferred income by immediately placing dividends into your IRA account through a firm.

However, there are more complicated tax practices at work that can allow you to properly make a living income off of your investments, and continue to reinvest in the same or other REITs.

Should You Invest in REITs?

Publicly traded REITs can be liquidated, and non-publicly traded REITs cannot be. Both can be excellent sources of tax deferred IRA funding, and if you play your cards right, REITs can even supply you with an income stream that can let you live within or beyond your means.

You don’t have to touch real estate, but you can be a real estate investor with REITs. Understand the risks before you throw your money in this mutual fund equivalent for real estate, and plan this as a long-term investment strategy.

REIT FAQ's

Are REITs a good source of passive income?

REITs are better for retirement than for income. Because they have complex taxation (stocks are fairly straightforward, REITs are not), it’s not something you can expect to live off of, at least not right now.

REITs are subject to heavy taxation, so the dividends should be used in an IRA so that they’re tax deferred, and help fund your retirement. So technically, REITs are good for income, just not income you can use right now.

Do REITs pay dividends?

They are classified as dividends, but in reality, REITs are different from traditional stocks. They are required to pay out 90% of all net profit to investors, regardless of the price of their current stock.

This means that many REITs traditionally use profits to reinvest as part of their business model, so this can be a slippery slope. 

Some REIT dividends will also be charged at a capital gains tax; REITs are required to break down information to you regarding what percentage of dividends are taxed at the capital gains rate.

In short, you should use REITs to help fund retirement accounts for better tax deferment.

Are REITs more riskier than investing in stocks?

Real estate investing in general has its own associated risks, but no, typically it is not more volatile or risky than trading stocks. In many instances, since the population is increasing and more individuals move to the United States, it can be more lucrative than investing in stocks.

Also, there’s no expiration on this, so you’re essentially investing once to receive a return for the long haul. This is how you make your money work for you.

Keep in mind that some REITs can be publicly traded like stocks, even if they still have a different repayment structure.

Is a REIT a good long-term investment?

Yes, REITs are typically considered good, safe, long-term investments. The real estate market can do just about anything, so while we’re all cautiously hoping that the 2008 housing bubble never happens again, REITs aren’t really affected by it in the same way. 

Because they primarily focus on commercial property (although some do rental properties), they cater to businesses. It’s a different model.

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About the author 

Donny Gamble

I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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