REITs Positioned To Make Gains in 2024, Say Industry Experts - NAI Mid-Michigan (2024)

FAQs

REITs Positioned To Make Gains in 2024, Say Industry Experts - NAI Mid-Michigan? ›

Rates boosting REITs

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

General requirements

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

Private REITs

The lack of government regulation makes it difficult for investors to evaluate them since little to no information is available publicly. Also, they are not required to prepare audited financial statements.

During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from “rents from real property.” It also provides that at least 75% of its gross income must be derived from that source.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

IRS safe harbor rules provide relief in situations where a REIT might engage in a prohibited transaction if REIT compliance is not met. To ensure these rules are satisfied: The property held to produce rental income must remain in the REIT for at least two years.

Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.

It's important to note that five or fewer investors can't own more than 50% of the shares in a REIT or it will be taxed as a personal holding company.

Does Warren Buffett recommend REITs? ›

Conclusion. Warren Buffet prefers to invest in REITs instead of real property because they are a great source of passive income, are reward-oriented, and are more liquid than property ownership.

REITs can be sensitive to interest rates and may not be as tax-friendly as other investments. When a REIT is concentrated in a particular sector like hotels, and that sector is negatively impacted, investors can see amplified losses.

Due in part to their attractive current yields, REITs have tended to deliver annualized total returns to investors of 10 to 12 percent over time.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

REITs Outperform Stocks During Recessions

Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

Invest at least 75% of total assets in real estate or cash. Earn at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales. Pay a minimum of 90% of taxable income in the form of shareholder dividends each year.

Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year. Be an entity that is taxable as a corporation.

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

30% Rule. This rule was introduced with the Tax Cut and Jobs Act (TCJA) and is part of Section 163(j) of the IRS Code. It states that a REIT may not deduct business interest expenses that exceed 30% of adjusted taxable income. REITs use debt financing, where the business interest expense comes in.