Investing in rental property is what some millennials, and Generation X may wish to do with the money they inherit from their baby boomer parents. The property might be a retirement home or an apartment. While the idea of being a landlord may look like a good one, it has its demerits. For instance, various costs and risks are involved. Thus, it may not turn out to be a profitable prospect.
Real Estate Investment Trust
Real Estate Investment Trusts are an alternative to direct real estate investment. These firms sell their shares to investors. They use the earned cash to buy residential, commercial, and industrial property to lease and pay dividends to shareholders. Compared to direct property ownership, REITs have significant tax advantages.
The New Federal Tax Rules
A certain provision of the tax law came into effect last year. It makes it possible for individuals to get heavy deductions on REIT income. A 20% deduction is offered to investors filing jointly and individually with a taxable income of less than $315000 and $157000 respectively. Deductions on a reduced scale apply to investors with higher taxable income up to $415000 filing jointly and $207000 individually.
While REITs may become more attractive by tax legislation, it perhaps makes direct real estate investments less so. A provision that’s received widespread attention is the new $10,000 cap on the itemized deduction of state and local taxes. Much of this is from property tax. This has caused dread in areas where the high values of property have led to large deductions for homeowners. For those investors in residential, this provision is paring post-tax profits.
Like stocks, most REITs are publicly-traded. This makes them highly-liquid, unlike most real estate investments. They are purchased and sold on major exchanges. While some REITs own property used for various purposes, most of them specialize. They own real estate used for healthcare facilities, shopping malls, and commercial office parks. Selecting these highly-specialized REITs for investment should be done after a keen analysis of specialized markets.
According to federal rules, entities must pay a minimum of 90% of its profits to shareholders in distributions to qualify as a REIT. Part of the income is in the form of taxable dividends. The rest is the return of capital. Many people that invest in rental property ignore the expenses involved and instead focus on the potential rental income. These investors also do not consider the risks that include property damage and unpaid rents. Many of them assume that values will rise with time, but this isn’t guaranteed. Even if that is the case, the gain before the sale may not completely compensate for a potential disparity between the cumulative costs and long-term income. In this case, contrary to the investor’s expectations, there would be no long-term profit.
Well-managed REITs can pay reliable dividends. However, they may encounter problems that result in losses being passed on to the investors in the form of pummeled share value, according to David Robinson, founder, and CEO of RTS Private Wealth Management.