Many Americans believe that real estate is one of the best long-term investment options available to them. In fact, a recent survey conducted by Gallup revealed that about 36% of surveyed Americans ranked real estate as their top choice for long-term investments. This percentage was higher than those who cited stocks, mutual funds, gold, or savings accounts as their preferred investment choices.
For those who see the potential of real estate as a long-term investment, Real Estate Investment Trusts (REITs) present a convenient way to enter the market. REITs are publicly traded companies that invest in various income-producing residential or commercial real estate properties. Investing in REITs can be as simple as purchasing shares of a publicly traded REIT or investing in a REIT mutual fund or exchange-traded fund.
According to financial experts like Stacy Francis, REITs have a “low barrier to entry,” making them accessible to a wide range of investors. One of the primary ways in which REIT investors make money is through dividend payments. Additionally, REITs offer opportunities for diversification by exposing investors to various types of real estate properties, such as shopping malls, warehouses, and office buildings.
While real estate investments can be emotionally fulfilling and serve as a legacy for future generations, they also come with significant challenges. Becoming a landlord entails a substantial investment of both money and time. Managing, insuring, and servicing a property can incur additional costs that may not be present in other types of investment portfolios.
Before investing in REITs, it is essential to conduct thorough research on the funds available. It is crucial to remember that while REITs can contribute to portfolio diversification, they should not make up the entirety of one’s investment holdings. Financial advisors recommend that REITs should constitute no more than 25% of an investor’s overall portfolio.
Investors should also be mindful of how investing in REITs may impact their tax situation. Since REITs typically distribute a significant portion of their profits in the form of dividends, these dividends may be subject to ordinary income taxes. One way to mitigate the tax burden is to hold REIT investments in tax-sheltered accounts, such as individual retirement accounts.
Real estate and REITs offer unique opportunities for investors looking to build wealth over the long term. While real estate investments can be emotionally rewarding, they also come with significant challenges. REITs, on the other hand, provide a more accessible way to participate in the real estate market while offering opportunities for diversification. By carefully considering the benefits and risks associated with real estate investments and REITs, investors can make informed decisions to help achieve their financial goals.