Investing in Real Estate – How Profitable are REITs

If you’ve been looking for the best channels to invest in real estate, one of the primary considerations is sure to be profitability. You’ll want to invest your money in products that are likely to earn you the highest yields with the minimum tax cut. According to this review of Fundrise, purchasing units in a Real Estate Investment Trust (REIT) is likely to earn you the maximum returns. Here’s some information you might find interesting.

REIT Dividends Vs. Stock Dividends

Although REITs operate similar to mutual funds, they have a critical difference. REITs purchase or manage real estate while mutual funds channel investors’ money into the stock exchange. Whereas the average dividend earnings on stocks in the Standard & Poor’s (S&P) 500 is around 1.9%, most equity REITs that own properties pay around 5% in dividend. Depending on the year and the particular portfolio you’ve invested in, you can expect to earn returns anywhere from 7.4% to 12.4%. These returns are paid out on a quarterly basis. You’ll also have the opportunity to earn money by way of capital appreciation, though these returns can be accessed only when the REIT liquidates the asset.

Understanding Taxation Laws for REITs

Purchasing REIT units can help you make significant tax savings. The law requires the real estate company to pay out at least 90% of its taxable income to qualify for the benefits of REITs. As long as the company complies with the conditions of an REIT organization, it need not pay corporate taxes. All of these savings are passed on to the unit investors, thus investments such as Fundrise are guaranteed to benefit investors. 

Check out this example. If a REIT company earns a taxable profit of $20 million, the shareholders stand to earn up to $18 million in dividend. However, if a non-REIT company earns a similar profit of $20 million, it will have to pay a corporate tax of 21%. The company is left with a balance of $15.8 million that it can distribute among the shareholders. 

Let’s Talk About the Taxes Investors Pay

The next question on your list likely concerns taxation. You’ll want to know about the taxes you’ll pay on the dividends earned from REITs. Since these companies pay 90% of their taxable income to the investors, they are classified as “pass-through” businesses. The dividends you earn from a pass-through entity qualifies for a new tax deduction where you’re allowed to deduct 20% of your income. Further, since the IRS does not recognize the REIT as a “specified service trade or business,” there are no income limits to the use of the deduction. 

All income earned from REITs is considered an above-the-line deduction and can be used even if you list the deductions on your tax return. In case you’re not quite how the deductions work, you can rely on the statement sent to you by the REIT each year. You’ll see a “Section 199A dividend” with the qualified business income for the deduction and information about how the REIT distributions are classified.

Investing in real estate through an REIT is, undoubtedly, a viable opportunity that can earn you rich returns with minimal taxation.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.