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I’ve been investing in real estate for a very long time.
From the home I live in, to property companies, to physical investment properties.
But one of my favourite real estate investments is real estate investment trusts (REITs).
REITs were created back in 1960 to allow regular everyday investors to invest in large portfolios of income-generating real estate.
U.S. President Dwight Eisenhower approved the legal framework for a real estate structure that’s similar to the mutual fund structure for investing in stocks.
REITs have since spread around the world as an increasing number of jurisdictions create their own REIT legislation. In Asia, Australia has a large REIT market, with REITs available there since the 1970s.Other relatively developed REIT markets include Japan (since 2001), Singapore (2002) and Hong Kong (2005).
What is a REIT?
A REIT is a company that owns a portfolio of income-generating real estate. The properties owned by REITs vary hugely – they can be commercial (i.e. offices), retail, residential or industrial, and can even include hotels, hospitals and forestry.
REITs don’t even necessarily need to own real estate. Mortgage REITs (MREITs) own bundles of commercial and real estate mortgages, for example. In the case of MREITs, an investor is buying a portfolio of the mortgage debt or mortgage securities.
Just now, I’m going to focus on REITs that own bricks and mortar real estate – also known as equity REITs.
There are lots of good reasons for you to own REITs… here are five:
1. Earn income
By law, REITs have to pay out nearly all of their taxable income to shareholders in the form of dividends. Whilst the percentage of income that must be paid out varies depending on the specific REIT country jurisdiction, it’s usually at least 90 percent.
These REIT dividends are all backed by rents. The REIT owns (and often manages) portfolios of underlying real estate. It collects the rent and pays out nearly all of that income to you. And what’s more, it has to, by law.
In Asia-Pacific, there are REITs holding portfolios of quality properties paying 5 to 7 percent or more in dividends. This is attractive in a world of persistently low interest rates.
2. REITs are tax efficient
As an investor in a regular listed stock, by the time you get that dividend cash into your brokerage account, it’s been heavily taxed.
Dividend income from regular listed companies is taxed twice. Firstly, it is taxed at the company earnings (or profits) level. In the U.S., for example, whilst the final effective corporate tax rate varies from company to company, the headline tax rate is 35 percent.
The second level of taxation is at the dividend itself, which, depending on your circumstances, can be up to 20 percent.
