Can Real Estate Increase Your Income?

Have lower interest rates and the reduction of corporate dividends caused a drop in your income? If so, you may want to consider including real estate investment trusts (REITs) as a portion of your portfolio.

Congress created REITs in 1960 as a way for all investors to own large-scale, income-producing commercial real estate. REITs are similar in concept to mutual funds in that they use professional management to oversee the investments. The difference is that REITs use a diversified portfolio of income-producing property or mortgage loans instead of stocks or bonds.

REITs offer:

• An attractive dividend yield—REITs must pay out 90 percent of their taxable income as dividends to shareholders. In exchange for this high payout, REITs do not have to pay corporate income tax. This results in higher dividends than many stocks and bonds.
• Predictable income—Rental income is the prime source of earnings for REITs. This income is often locked-in by long-term leases with tenants and can add to the stability of the REIT. However, the lengths of the leases depend on the types of properties owned. For instance, storage facilities are rented out month-to-month, whereas industrial buildings are often leased out for 10 or 20 years. Of course, economic conditions will affect occupancy rates and rental income.
• Tax benefits—You might not have to pay tax on all of income you receive from a REIT, since a portion of that income could be a partial return of your investment principal. This would reduce the cost basis of your investment.
• A hedge against inflation—Rents generally rise with rising prices.
• A unique asset class—The real estate market tends to move in different cycles than the financial markets. Therefore REITs can provide a hedge against the volatility and under performance of other assets.
• Liquidity—Because REITs are traded on the major exchanges their shares are easily bought and sold.

Remember that REITS are shares and can fluctuate as much as any other stock and there is no guarantee of profit or a continuing dividend. Please return the enclosed coupon for a list of REITS with attractive yields.