Can you become a millionaire from REITs?
At that rate of return, a monthly investment of $300 in REITs would grow into $1 million in about 30 years. If you invested more money into REITs or those producing a higher average annual return, you could become a millionaire even faster.
REITs' average return
Return a minimum of 90% of taxable income in the form of shareholder dividends each year. This is a big draw for investor interest in REITs. Invest at least 75% of total assets in real estate or cash.
An eye-popping yield likely inspired Jeff Yass of Susquehanna to buy 1.4 million shares of AGNC in the third quarter. Yass isn't the only billionaire placing bets on this mortgage REIT. John Overdeck and David Siegel of Two Sigma Investments scooped up 1.2 million shares.
The properties owned by REIT companies can appreciated in value over time, thus growing your initial investment. REITs are professionally managed, to get the greatest returns on the individual properties. REITs provide diversification to a stock and bond portfolio and can curb portfolio losses should stock prices fall.
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses.
For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 5.2%.
| Company (ticker) | 5-year total return | 5-year dividend growth |
|---|---|---|
| Plymouth Industrial REIT (PLYM) | 156.1% | 1.6% |
| Equinix (EQIX) | 125.0% | 9.5% |
| Prologis (PLD) | 121.8% | 12.4% |
| Eastgroup Properties (EGP) | 107.9% | 13.3% |
This is known as the geographic market test. Section 856 (d)(2) (C) excludes impermissible tenant service income (ITSI) from the definition of rent from real property, making it “bad income” for the 75% and 95% REIT gross income tests.
Does Warren Buffett invest in REITs?
Buffett has not shown much interest in real estate investing in the past. He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy. Berkshire Hathaway Inc.
“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.
There are several benefits to investing in REITs, including: Passive income: REITs must pay out at least 90% of their taxable income to shareholders as dividends. This means that REIT investors can earn a steady stream of passive income without doing any work.
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A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means, to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield. Furthermore, potential capital gains can add to your total returns.
Interest Rate Risk
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.
How Do You Make Money on a REIT? Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable.
| Stock | Market Capitalization | 12-month Trailing Dividend Yield |
|---|---|---|
| Gladstone Investment Corp. (GAIN) | $500 million | 6.9% |
| Modiv Industrial Inc. (MDV) | $112 million | 7.7% |
| LTC Properties Inc. (LTC) | $1.3 billion | 7.2% |
| Realty Income Corp. (O) | $44 billion | 6.4% |
Do REITs take on debt?
Since real estate investment can carry high debt levels, the sector is subject to interest rate risk. D/E ratios for companies in the real estate sector, including REITs, tend to range from 1.0 to over 8.0:1.
REITs allow individual investors to make money on real estate without having to own or manage physical properties. Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making.
According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.
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.
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
