Real Estate Stocks

REAL ESTATE investment trusts come in two basic flavors. Mortgage REITs earn interest by providing financing to real estate owners and operators. Equity REITs purchase and operate properties such as apartment buildings, shopping centers, warehouses and office buildings. They collect rent and other income, which is then passed along to shareholders, and also occasionally make money by selling properties at a profit. Equity REITs account for 95% of REIT assets.

Investors’ appetite for REITs is heavily driven by interest rates, with falling rates often spurring strong gains among REITs. For the recent performance and yields on REITs, check out FTSE NAREIT’s all equity REIT index.

REITs must distribute at least 90% of their taxable income to shareholders each year. Those dividends can be deducted against a REIT’s taxable income, so most REITs pay no corporate income taxes. Because of this favorable tax treatment at the corporate level, the dividends paid to REIT shareholders don’t qualify to be taxed at the long-term capital gains rate. Instead, they’re taxed as ordinary income. Because of that tax treatment and because REITs kick off more income than most other stocks, you should probably hold your REITs in a retirement account.

Most major mutual fund companies, as well as the big ETF providers, now offer funds that invest in REITs. There are also many closed-end funds focused on real estate. For more on REITs, check out the website REIT.com/investing.

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