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How To Start Investing In REITs

David John Marotta ,

Contributor

I write on the small changes that can yield enormous gains over time.

Opinions expressed by Forbes Contributors are their own.

Continued from page 1

Second, REITs must distribute more than 90% of their profits as dividends. As a result, REITs have a dividend yield which is higher than average. Currently, the dividend yield for Vanguard’s REIT ETF (VNQ) is 4.21% while the dividend yield for Vanguard’s S&P 500 ETF (VOO) is only 2.10%.

In exchange for abiding by these and other rules, the IRS does not require REITs to pay income taxes.

Publicly-traded REITs are listed with the Securities and Exchange Commission and trade like stocks throughout the day. Because they are publicly priced and traded, you can always buy or sell them with a very small spread.

There are corporations that qualify as REITs but are either not listed on stock exchanges or not publicly owned. These non-publicly traded REITs have numerous potential problems and we recommend avoiding them. We recommend insisting on publicly priced and traded investments and don’t recommend investing in any illiquid assets.

You might think that not being taxed at the corporate level would mean that real estate appreciates more than stocks. This is not true. While bonds appreciate on average 3% over inflation and stocks appreciate about 6.5% over inflation, real estate falls between these two. Residential real estate investments appreciate about 4.1% over inflation and commercial real estate investments appreciates about 4.9% over inflation.

Simply because REITs have a lower mean return doesn’t mean that REITs should not be part of your investment portfolio. REIT investments have a low correlation to U.S. stock investments. They also have a lower volatility than U.S. stocks. The lower volatility and low correlation together means that REITs find a place in the efficient frontier of investing when you are crafting your investment plan.

Here for example is the return and standard deviation of portfolios built solely from two investment indexes: The Wilshire REIT Index and the S&P 500 Composite Total Return. The data is from 12/31/1977 through 4/30/2016.

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> http://www.forbes.com/sites/davidmarotta/2016/06/14/a-guide-to-investing-in-reits/2/#645cb40119ef

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