How do you make money with a REIT?
Properties can generate rental income, which, after collecting fees for property management, provides income to its investors. These REITs generate income from renting real estate to tenants. After paying expenses for operation, equity REITs pay out dividends to their shareholders on a yearly basis.
The Bottom Line
REITs deliver diversification for your portfolio, potentially generate steady income through dividends, and give you exposure to a range of properties. REITs can also serve as a hedge against inflation and have historically delivered competitive long-term returns.
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable.
Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.
Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses. REIT dividends historically have provided: Wealth Accumulation. Reliable Income Returns.
To make $1,000 per month on T-bills, you would need to invest $240,000 at a 5% rate. This is a solid return — and probably one of the safest investments available today. But do you have $240,000 sitting around? That's the hard part.
REITs generate passive income primarily through leasing space and collecting rent on their properties. This rental income is the main source of revenue for REITs, and is then distributed to shareholders in the form of dividends. By law, REITs must pay out at least 90% of their taxable income to shareholders.
You make money from REITs in the form of regular dividend payments. REITs earn income from the collection of rents and fees on the real estate they own. They then pay out a portion of this income to its investors as dividend payments on a regular basis, often quarterly or twice a year.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.
How long should I hold a REIT?
In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.
80-20 Rule: At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under construction buildings, equity shares, bonds, cash, or under-construction commercial property.
Investing in REITs is as simple as opening a brokerage account, or investment account, which usually takes just a few minutes. Then you'll be able to buy and sell publicly traded REITs just like you would any other stock.
The potential downsides, or CONS, of a REIT investment include the fact that they are taxed as income, the variation in the fee structures of different managers, and market volatility due to interest rate movements or trends in the real estate market.
While finding REITs that offer monthly dividends instead of quarterly is somewhat challenging, it is certainly not impossible. And when you do find and invest in these trusts, you'll receive stable, monthly dividends that can grow your portfolio or offer passive income.
Credit risk.
Mortgage REITs are exposed to the risk of default by borrowers on the underlying mortgages. If a significant number of borrowers default on their mortgages, the value of the mortgage-backed securities held by the REIT may decline.
- Opening a high-yield savings account. ...
- Investing in stocks, bonds, crypto, and real estate. ...
- Online selling. ...
- Blogging or vlogging. ...
- Opening a Roth IRA. ...
- Freelancing and other side hustles. ...
- Affiliate marketing and promotion. ...
- Online teaching.
| Rate of return | 10 years | 20 years |
|---|---|---|
| 4% | $72,000 | $178,700 |
| 6% | $79,000 | $220,700 |
| 8% | $86,900 | $274,600 |
| 10% | $95,600 | $343,700 |
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
Bad REIT Income means (i) the amount of gross income received by the Borrower (directly or indirectly) that would not constitute (A) “rents from real property” as defined in Section 856 of the Internal Revenue Code or (B) interest, dividends, gain from sales or other types of income, in each case, described in Section ...
Do you pay tax on REIT income?
A REIT is taxable as a regular corporation, but is entitled to the dividends paid deduction. Therefore, a REIT does not pay federal income tax on net taxable income distributed as deductible dividends to shareholders. Net income from foreclosure property is taxed at 35 percent.
REITs make money by collecting rental income or interest on a monthly basis. In the case of equity REITs, they also earn money from the equity buildup and capital appreciation. Then, when the REIT sells the property, they distribute the profits to the shareholders.
REITs own and finance real estate and pay 90% of their income from rent, interest and capital gains as dividends. While REITs tend to produce reliable income, they are subject to real estate cycles of boom and bust and are also sensitive to interest rate changes.
Making money investing in REITs
Making money involves combining two things: dividends and share price appreciation. These combine to produce higher-than-average dividends because investors need to be paid a minimum of 90% of taxable income to make the yield averages greater than returns.
Additionally, REITs offer the potential for capital appreciation, allowing your investment to grow in value over time. By combining dividend income with the opportunity for capital appreciation, REITs can enhance your financial stability and help you build wealth passively.
