A real estate dividend trust (REIT) adds both, a source of passive income, and exposure to the real estate market, to an investment portfolio. This makes it an excellent option for most investors. Read on for a closer look at multifamily REITs and what you need to know before investing.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More.
The Basics of REITs
Real estate investing does not have to be time-consuming or costly, and few methods are as user-friendly as REIT investment. By purchasing shares of a REIT, investors can add real estate holdings to their portfolios with minimal effort.
REITs are companies that profit from income-producing properties, either by owning and operating the asset itself or purchasing or originating mortgages and mortgage-backed securities. Investors buy shares of a REIT, and in turn, earn passive income through dividend payments.
Investors pursue REITs primarily for dividends rather than for stock appreciation. Of course, shares may fluctuate in value, but the dividend restrictions discussed below can make it challenging for the overall value of the REIT to grow.
REIT Dividends
To maintain status as a security, REITs must payout at least 90 percent of their taxable income as dividends. Dividends include both capital gains and rental income, and REITs do not pay corporate income tax on the earnings that they pay out. Instead, the dividend recipients shoulder the tax burden, as REIT dividends are taxed at the ordinary income tax rate rather than the dividend tax rate.
For investors, the disappointing element of REITs is that the 90 percent dividend is a bit misleading. REITs are only required to pay 90 percent of their taxable income as dividends, and the companies have many ways to reduce that figure.
We frequently discuss the tax advantages of owning real estate, like the depreciation and mortgage interest deductions, and they also apply to REITs. But, unfortunately, as a REIT shareholder, those tax advantages cut into the money that would be going into your pocket.
Multifamily REITs
REITs often focus on one asset class, which is helpful for investors who want to add a specific type of real estate to their portfolio. For example, REITs may specialize in long-term storage facilities, medical office buildings, hotels and tourism, corrections, and, of course, multifamily properties.
Multifamily properties are a building block of many REITs, in part because the Internal Revenue Code requires that a REIT earn at least 75 percent of its gross income from rents, mortgage interest, or real estate sales. Thus, for consistent rental income, there is no place better to look than multifamily assets.
Multifamily REIT Performance
Historically, REITs outperformed the S&P 500, but how well a particular one does is very dependent on the asset type in which it focuses.
REIT dividends track with the overall performance of a given real estate sector. Population growth, job growth, accessibility of homeownership, and population ages all impact the multifamily market in particular.
Between long-standing single-family home inventory issues, an ever-increasing population, and expected rent increases, multifamily investment remains promising, whether by REIT or another method.
Currently, multifamily REITs sit in the middle of the overall REIT pack in terms of performance. Average returns for multifamily REITs as of August 2021 were 1.9 percent, well above office REITs at -4.31 percent, and below corrections REITs at 11.99 percent.
Finding a Multifamily REIT
REITs come in a few different forms. The easiest to find and buy are publicly-traded REITs, which çan be purchased through a broker as with any other publicly traded stock. Other REITs are public but not listed on exchanges, and still others are private.
In all, there are 12 equity subsectors of REITs, with multifamily or residential properties being one of them. Multifamily REITs tend to focus on a specific geographic area, like the East Coast or West Coast, or specific urban or suburban markets.
Here are a few popular multifamily REITs to start your research:
- AvalonBay Communities (NYSE:AVB)
- Camden Property Trust (NYSE:IRT)
- Apartment Investment and Management Company (NYSE:AIV)
- Starwood Property Trust (NYSE:STWD)
As always, do your due diligence before making any investment.
Final Thoughts
REITs have a place in many portfolios because they create passive income, have a low cost of entry, and are simple to access. However, investors with $100,000 or more to invest should look to options with larger potential returns. Real estate syndications, which often work with multifamily assets, generally outperform both the stock market and multifamily REITs.
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Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More.
