This Secret Loophole Could Pay Off Huge For REIT Investors
There was a time whenwas out of reach for the small investor.
Back in President Dwight D. Eisenhower's era, policymakers in Washington noted a clear conundrum. Aboom was under way, but most small investors were missing out. It would cost a of to build a shopping mall or an office tower, and the lucrative business of being a professional was reserved to those who had of .
I'll tell you more about those big tax advantages in a minute.
These firms, run by real estate professionals, adhere to one simple rule: More than 90% of profits every year have to be returned to investors in the form of dividends. Yet by doing so, all of those profits made by REITs can bypass federal . Profits are only taxed at the level of individual shareholders.
But there's an interesting movement afoot. It's anon-real estate companies have taken advantage of, one that investors can now in on. For tax reasons, the REIT corporate structure has begun to appeal to many firms outside the traditional realm of office buildings, shopping malls and apartment complexes. Take Internet data traffic management firm Equinix (Nasdaq: EQIX).
In early 2012, media reports circulated that the company's The company's public comments seemed to suggest that the idea had merit. After all, Equinix owned many large and valuable buildings (where its Internet traffic equipment resides) and the company was financially strong enough to pass on most of its profits to investors.would zoom higher if Equinix decided to re-classify itself as a REIT.
The company successfully petitioned the InternalService to let it become a REIT in September 2012, and investors who had spotted this move coming profited handsomely.
Since then, a number of firms have followed Equinix's lead, hoping for similar gains.
Why would these stocks move up in value? Because lower means more left over for shareholders.
Look for this trend to continue throughout this year.
[InvestingAnswers Feature: REITs: The Easiest Way to Invest in Real Estate]
Today, there are now more than 400 REITs across a few dozen countries, collectively managing roughly $1 trillion worth of real estate. Popular publicly traded REITs in the United States include:
- Simon Property Group (NYSE: SPG), which focuses on shopping malls
- Public Storage (NYSE: PSA), self-storage facilities
- HCP (NYSE: HCP), hospitals and other health care facilities
- Ventas (NYSE: VTR), hospitals/health care
- Residential (NYSE: EQR), apartment complexes
- Boston Properties (NYSE: BXP), office complexes
But for all of their appeal, because REITs must pass on almost all of their profits, they have little So investors really look at these firms as income producers and don't expect to see robust share price .left over to pursue growth. If they do choose to expand, they often sell newly issued , which means per share won't grow very much (as profits from growth initiatives and the share count grow at a similar pace).
Of course, the dividend yield that these firms is continually weighed against the payouts that other income-producing . In recent years, REITs have held a great deal of appeal relative to government bonds and CDs because those financial instruments often yields below 2%. In contrast, the for a REIT can approach 4% or even 6%.
Because these REITs can't magically produce higher income streams to boostpayments, the only way for these yields to rise is for their share price to fall. (Remember that a dividend yield moves in the opposite direction of a price.) That's why REITs may not be a great once we enter a period of rising interest rates. But we're not there yet, and right now REITs continue to hold relatively strong appeal in this low-yield, low-inflation environment.
The The right REIT for you depends on your risk appetite.Answer: With any income-producing , higher dividend yields reflect greater possible risk. So a REIT with a relatively high yield may be seen as having a weaker set of real estate assets.