When you have a little bit of extra money, investing is the right move. Make that money work for you instead of having to work for every dollar that you earn. It’s a pretty simple concept but one that bears asking: how do I invest?
Perhaps you have heard a term bandied about but don’t really know what it entails: REIT. What is a REIT? Should you invest in one? Here is your basic guide to REITs.
What Is a REIT?
REITs are companies that own and operate real estate properties. Some of them specifically invest in commercial property such as office buildings and parking lots. Legally speaking, REITs have to distribute 90% of their profits through dividends.
Furthermore, most of those dividends are paid out quarterly, making them a quality interest-earning vehicle, particularly for retirees who are looking for steady income. Even better, REITs do not have to worry about paying corporate income tax.
REITs generally have a pretty solid return. As of June 2020, the five-year return on US REITs was 15.76%. There are, of course, REITs that perform higher over that time period. Things have been a bit more conservative in the wake of the 2008 financial crisis, however.
What Is the Risk?
Since REITs are traded on the stock market, that means they have risks that are associated with equity investments. They also tend to be impacted when real estate prices are suffering. Moreover, there have been periods where REITs have underperformed even though they are a sound long-term investment.
When interest rates are either elevated or rising, REITs have the potential to produce a negative total return. When rates are higher, investors will move back toward fixed-income investments as a safety net, hurting REITs.
Should You Invest?
If you are okay with a steady return on your investment in the face of a major boon or are looking for steady income in retirement, REITs are a great way to go. They don’t have the potentially huge gains, but typically hold steady.