How Do You Earn Money from a REIT?

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How Do You Earn Money from a REIT?

Earning money from a publicly owned real estate investment trust (REIT) is like earning money from stocks. You receive dividends from the profits of the company and can sell your shares at a profit when their value in the marketplace increases.

Factors to consider

Of course, the amount you earn depends largely on the successful management of the REIT, as well as market conditions.

On the other hand, building a successful REIT requires considerable management skill. When a REIT runs into a problem with a particular property, the REIT cannot sell it as quickly or easily as, say, a mutual fund can sell poorly performing stocks or bonds.

As an investor, you will want to review a REIT’s equity and mortgage properties before purchasing its shares. Some REITs carry a lot of risk, while others offer much more stability. In general, shares in REITs that invest heavily in mortgage loans may be more volatile than shares in REITs that focus on equity investments, since fluctuations in mortgage loan interest rates can quickly affect the REITs’ performances.

Some tax facts about REITs

REITs have certain tax advantages and rules to follow. For instance, 90 percent of a REIT’s net earnings must be distributed each year to shareholders, in order to avoid corporate taxes. This rule results in higher income for the investor.

In the event your REIT investment loses money, you can deduct up to $3,000 of your losses from your taxable income, which can offset other income and gains in other investments.

Do your homework before you invest

While REITs take much of the risk and hassle out of investing in real estate, that doesn’t mean they’re worry-free. It’s important to understand the dynamics of the real estate market, as well as the performance of a particular REIT, before you buy your shares.