Investment in real estate is always evaluated positively by people. Such investments are synonymous with a reliable and competent investment. Owning residential or commercial space, you can earn money either by renting them out or reselling them at better prices. The only upsetting thing is that initially millions of rubles are needed to buy real estate, which, as a rule, are not available; time to search for real estate, and then tenants or buyers for it. Funds will also be needed for the maintenance of premises and utility bills. And, if we are talking about real estate, then the effort spent will be many times more.
How REITs Make Global Investment Easier?
Investing in overseas real estate can be easier if you know about REITs.
REITs (Real Estate Investment Trusts) are real estate investment trusts (or trusts) that buy or build properties around the world, then rent them out. They operate on investors' money and pay them dividends from profits. REITs are required to give 90% of their income to depositors. Dividends are usually paid once a quarter.
It is worth noting that this form of real estate management exists abroad, mainly in the American and European markets. That is, most of these trusts are foreign investments. In USA, such investments also exist, but most often in the form of closed-end mutual funds available only to qualified investors.
The average return on REIT shares is 2-5% in dollar terms. This is slightly less than the yield on foreign stocks of companies, but more than the yield on government bonds. Earning income in dollars is a good option for those who are afraid of the devaluation of the national currency.
In order to become a co-owner of collective real estate, you do not need millions. It is enough to purchase a share of the fund, the cost of which starts from 100-200 dollars. Shareholders are freed from routine - all further legal relations with tenants (potential buyers), as well as activities for the proper maintenance of square meters are carried out by REIT managers.
What are the Types of REITs?
Mainly, there are two types of REITs:
- Equity REITs
Major share of the income of such funds is formed at the expense of lease payments. The resale of real estate is not excluded as one of the options for increasing profits. There are the most equity REITs in the world and they are more popular with investors as they have a transparent structure of activities and clear criteria for assessing profitability.
Equity REITs are also divided by sector:
- Office Real Estate
- Warehouse
- Living
- Social
- Hotel
- Trading
- Infrastructure Facilities
- Mortgage REITs
They do not own real square meters, but mortgage bonds. There are also mixed-type REITs, which include physical real estate and mortgage bonds.
REITs usually mix real estate from different areas of destination. It is rare that REITs deal only with commercial or residential space. In addition, REITs are not geographically limited: real estate from different continents can be concentrated in one fund. All this significantly diversifies investments.
Investing in REITs, Exploring Choices, Tax Benefits and Costs Across Borders
The main income of REITs is received from renting out real estate, which guarantees a stable flow of funds to the fund, and high dividends to depositors. This makes a REIT a desirable asset for an investor.
You can buy REIT units on the exchange both through a foreign brokerage account and from a local broker. But there are differences:
- A variety of choices. About 300 real estate funds are represented on world exchanges. REIT shares in USA are traded on the New York Stock Exchange (NYSE) and NASDAQ - about 40 funds from the S&P 500 index. Recently, REITs proposal have also appeared on the NYSE in the ESG category - solar real estate trusts. That is, a foreign broker has a wider choice of course.
- Tax burden. An investor pays 30% to 35% tax on income and dividends on American stocks to the USA budget. This will be the case if you buy on the domestic exchange. You can save a lot when buying REITs assets from a foreign broker. In this case, 10% will be retained by the USA treasury and 3% will go to the budget. Obviously, 13% is not 30%. It should be borne in mind that the investor will need to draw up a tax return with the Federal Tax Services in the event of the acquisition of REITs shares through a foreign brokerage account.
- Fees for account maintenance and transactions. A foreign broker charges a commission for maintaining an account. Local broker does not charge but the foreign has a much lower commission on transactions than the local.
- Capital. The entry threshold for trust funds that are listed on NYSE or NASDAQ is lower than the REITs that a foreign broker can offer. Roughly speaking, to work with a foreign broker, you need more solid amounts on the account.
How to Choose a REIT for Passive Income?
You will have to select REITs for investment, paying attention to key financial indicators - capitalization, profitability of recent years, credit ratings, the composition of real estate and its geography, the prospects of the selected areas etc. For example, now it is worth paying attention to REITs - leaders in the field of telecommunications infrastructure; REITs owning land plots for quick assembly housing, data centers, warehouses (in the wake of e-commerce development); REITs in Healthcare. In general, those funds under the management of which real estate will be in demand. In addition, it is always a good idea to research the official websites of companies.
For passive investing, ETFs on REIT funds are more suitable. This is a kind of nested container - there are several other funds in the fund. Broad diversification allows you to significantly reduce risks. The largest REIT ETFs in the world are the Vanguard Real Estate Index Fund - VNQ and the Vanguard Global Ex-USA Real Estate Index Fund - VNQI.
Building Wealth Through REITs Investment with Low Budget
REITs can be a valuable addition to a millennial's investment portfolio. They offer hassle free pathway to invest in real estate with smooth transfer of percentage ownership. The REIT tool has reliability, high profitability, protection against inflation, extensive diversification of investments, and liquidity of shares. However, this investment sector demands long term orientation of the investors to get a regular stream of income by investing in a high value industry with low amount of budget through REITs. At 20-30 years, the magic of compound interest begins to work - the growth of total capital is such that it easily covers the costs incurred earlier.
