For investors considering real-estate income, great deals can be found in real-estate investment trusts (REITs). REITs purchase mainly property such as apartments and office parks. Income taxes are avoided so long as the majority is paid out to shareholders in the form of dividends. REITs are purchased just as regular stocks are, but the focus is on the dividend yield; i.e. the percentage of share price paid out as dividends.
With REITs taking a 20 percent dip, investors may be able to take advantage of low interest rates.
With the recent hit taken by REITs, dropping almost 20%, according to one index, the time may be ripe to take advantage of low interest rates coupled with strong demand and tight supply. Even prices have become more attractive lately.
Investing in REITs requires caution, however, as the specialization in portfolios can be wide-ranging.
Investors do well to compare different portfolios by comparing lease periods for the buildings held. Short leases mean a quicker change in cash flow – corresponding to economic changes. Longer leases are usually steadier investments.
For example, REITs in hotels are on the shorter end, as leases cover room bookings of one or two nights. On the other end of the spectrum is a health-care facility with leases over 10 years on average.
Office space is among the most popular areas of the market, but in this segment where high-demand exists, high costs have had REITs yielding dividends of around 2-3%.
Well-positioned REITs are those focused on multi-family housing. The single-family market is ailing, and homeownership rates continue to lose ground to renting.
REIT purchasers must account for leverage as well. To increase returns, investors use debt -and for now, interest rates are good. Just be cautious of debt levels in excess of 65% of assets.