Real Estate Wars. House Hunters. The Deed. Love It Or List It. Million Dollar Listing. These popular reality Television shows are proof positive that next to baseball, there’s no greater national pastime than real estate.
Television isn’t real life, though. Not everyone has the time (or money) to buy and flip or go in on a big land deal. But if you’ve always dreamed of investing in real estate, but didn’t know how or where to begin, Real Estate Tycoon, a Real Estate Investment Trust, or REIT, could be for you.
What’s a REIT?
Think of it this way: A REIT is similar to other funds. But instead of holding stocks or bonds, it holds real estate. As for the “trust” part of the name, it’s a legal structure that helps the REIT avoid paying corporate taxes.
Essentially, REITs help to finance commercial or residential real estate projects that produce income. This real estate can include shopping malls, hospitals or other medical facilities, hotels, office buildings, and movie theaters.
What’s the difference between a REIT and investing in real estate yourself?
Whether you invest in a REIT, or buy a house, you’re investing in real estate. However when you invest in a REIT you don’t have to worry about managing the property, the tenant, the leases, and the other hassles.
Another difference: If you own a house or an office building, for example, and want to sell it, you have to put it up on the market and wait for the right buyer to come along. When you invest in a REIT, it’s a whole lot simpler. You can buy or sell shares at any time.
Just like any other publicly traded company, REITs are divided by shares. You, as an investor, are allowed to purchase shares of a REIT, which investors typically do through a broker.
So what’s a REIT ETF?
It’s a lot of acronyms but stay with us. A REIT can also be an ETF. And like an ETF it trades throughout the day like anything else on an exchange, such as a stock or a bond.
There are about 200 REIT funds in the U.S. and they can be structured in different ways. The majority own actual real estate. Others can own debt, such as residential or commercial mortgages.
Real Estate Tycoon, also known as VNQ or the Vanguard REIT Index Fund, tracks an index of publicly traded REITs. It only invests in shares of trusts that actually own real estate property.
Just for comparison’s sake, an example of a REIT that owns debt is Annaly Capital Management, which owns and invests in a combination of residential and commercial mortgages.
How is this REIT ETF different from other ETFs?
When you invest in Real Estate Tycoon, you are essentially buying fractions, or shares, of real estate property across the United States. Some of the property where you invest is leased and collects rent from people or businesses at residential complexes, malls, or warehouses to name a few.
As an investor and owner of a REIT, you are entitled to collect the rental income obtained from the leasing of properties within the REIT. The rental income you receive is proportionate to your fraction of ownership of the property. Investors usually refer to the income obtained from REITs as dividends, however it’s important to keep in mind as an investor in REITs, you’re receiving rental income. It’s similar to renting your home to a family, and collecting income.
What’s in the Real Estate Tycoon ETF on Stash?
Real Estate Tycoon is one of the largest REITs by asset size. The fund holds the stock of 156 company REITs.
This fund invests in office parks, apartment complexes, health care facilities, and residential complexes.
One of the biggest holdings in the fund, for example, is the Simon Property Group. It owns, develops, and manages retail real estate properties including malls, outlets and community and lifestyle centers across the United States.
It also includes Equinix and Prologis, leaders in logistics real estate, or all the warehouses and fulfillment centers that cargo ships, railways, and trucks depend on to make sure goods and merchandise are delivered.
The fund also contains more conventional real estate names like Boston Properties and Ventas, which invest in office parks and health care properties, respectively.
Here you can see the top REIT holdings in Real Estate Tycoon:
Simon has has ownership stakes in more than 60 properties across the U.S. Some of the properties it owns include:
- Clarksburg Premium Outlets, in Clarksburg (DC Area).
- 50% of The Shops at Crystals, a mall located in the Strip area in Las Vegas, Nevada.
- 50% of Brickell City Centre in Downtown Miami
REIT and tax considerations
REITs are required to pass much of the rental income they take in from real estate properties to their shareholders, in the form of dividends. By doing this, they’re not required to pay corporate taxes.
The dividends these funds pay are not considered so-called qualified dividends, which are the most common form of corporate dividend and which are taxed at a 15% capital gains rate. These dividends are considered rental income distributions, which are taxed at your individual income tax rate, which is usually higher.
Wait, what will investing in a REIT mean for my taxes?
If you’re holding a REIT investment in an account that’s not designated for retirement, the dividends from a REIT will be taxed at your individual tax rate, whether you reinvest them or not.
However, if you’re holding a REIT investment in a Roth IRA or another retirement account, it won’t mean anything, as the earnings on your investments grow either tax-free or tax-deferred.
REITs: What are the Risks?
REIT ETFs invest in the real estate industry. And just like any sector, whether that’s defense, tech, or healthcare, this sector can experience volatility. This was the case during the financial crisis of 2008 and 2009, when the residential mortgage meltdown spread to other sectors, including real estate property.
- When you invest in the Real Estate Tycoon ETF on Stash, you’re buying fractions of other REITs that own real estate properties across the country.
- These properties include shopping malls, residential complexes, hotels, and storage units, among others.
- A REIT ETF such as Real Estate Tycoon can be an excellent way to diversify your portfolio.
- You are diversifying a real estate investment portfolio by owning fractions of real estate in a vast array of industries including shopping malls, residential complexes, hotels, storage units among others.