REITs for Retirement

Tax-deferred accounts could provide a comfortable home for real estate-focused holdings — and their prospects for income streams.

Thanks to real estate investment trusts (REITs), real estate is no longer an asset class just for those willing to buy, rent, or maintain property. For smaller investors, buying into REITs through a stock, mutual fund, or exchange-traded fund (ETF) gives them an investment with a historically low correlation to stocks and bonds. Real estate offers an income stream  with  capital appreciation possibilities though it may not have as much upside potential as stocks.

At the same time, income yields on REITs tend to run higher than those on most bonds and dividend-paying stocks: 9.6 percent annualized over five years and 5.8 percent over 10 years, according to the Dow Jones Composite All REIT Index through the end of Q3 2017.

“REITs are a way anyone can invest in real estate without having to own and manage the real estate,” says John Poole, IRA Coordinator with Regions Private Wealth Management. “Someone else is responsible for all of the operations, maintenance, and management of the properties.”

Just What Is A REIT?

A REIT is simply a company that holds and manages real estate in many forms. 
A REIT may be packaged in many ways, with property holdings ranging from industrial warehouses to cellular towers. A REIT may also invest in real estate mortgages or hold a blend of real estate-oriented investments.

REITs are stocks which are available through a broker or can be invested in by purchasing shares in a REIT mutual fund or ETF. While REITs are as liquid as common stocks, by law REITs must pay out at least 90 percent of the income to shareholders. Given the nature of the dividend, the payments are largely taxed at each shareholder’s standard tax rate, which is generally higher than the tax rates assessed on dividend payments or capital gains.

Key to REITs and Taxes: Location, Location, Location

As a result, REITs may be investments in tax-deferred retirement accounts such as individual retirement accounts (IRAs) and 401(k) accounts to avoid current taxation of income.

“The only time REITs and taxes come into play with retirement vehicles is either on the contribution side or the distribution side,” Poole says. “Otherwise, all of this activity around REIT dividends can occur, and the investor doesn’t have to worry about taxes.”

Poole acknowledges that REITs can still work in taxable accounts, as long as the investor knows what he or she will be up against every Tax Day.

“In a period of low fixed-income rates, a REIT could offer a diversified alternative to standard fixed-income investments,” he says, “but you obviously don’t have the tax advantages of deferral.”

Risks of REITs

Like any investment, REITs carry risk, the degree of which varies from holding to holding. For example, if a REIT specializes in properties within a specific region, it will probably suffer in the wake of a slowdown in that geographic area. Also, mortgage-backed securities are sensitive to the interest rate environment, so challenges in that space can resonate within select REITs, which happened dramatically during the 2008-2009 economic downturn.

“We recommend that an investor should look at the underlying assets and the REIT owner’s investment philosophy to understand the potential risks,” Poole says. “It’s not just monitoring the performance of the REIT but keeping an eye on the REIT’s holdings, just like an investor should watch the fundamentals of a company in which one owns stock.”

For deeper insight into what REITs might be appropriate for an investment portfolio and how to add REITs to a retirement account, contact a Regions asesor de patrimonio hoy mismo.


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