REIT’s

Terry Says

REITS — Real Estate Investment Trusts — have a special place in the tax code. They can pass along 90 percent of their earnings to shareholders — and the company doesn’t have to pay corporate taxes on those earnings! (Most other corporations first pay taxes on earnings, and then distribute dividends to shareholders, who also must pay taxes on those dividends!)

Because of this tax feature REITS are often an attractive investment. BUT there are some caveats. If you own a REIT that invests in apartments, the company can raise rents on a portion of the tenants every year to keep up with inflation. A hotel REIT can raise rates instantly! But it doesn’t have the stability of a steady stream of income that can be guaranteed with one or two year apartment leases. A commercial office building may suddenly have one large tenant leave. A REIT that invests in retail store spaces can have a shockingly high vacancy rate in a recession — or if tenants lose business to online retailers. (Think of the shopping mall companies that have Sears stores as tenants!)

So not all REITS deliver consistent returns — even in the best of economies. And depending on their specialty, some REITS will outperform others. Consider all of this before being tempted by the higher yields of REITS.