To understand how REIT funds work, the best thing you can do for yourself is to talk to a financial advisor so you make the best investment decisions based on your retirement needs. REIT funds do not pay corporate income taxes and for this privilege they are required to disperse 90% of their profits to their investors in the form of dividends. Dividends can be used to increase your holdings in your portfolio or you can invest in other ways with the money you get.
There are two REIT mutual funds investment styles you should concern yourself with: Actively managed REIT funds and passively managed REIT funds.
Actively managed REIT funds buy and sell shares of real estate throughout the year according to an investment strategy based on research of the market. Due to all the buying and selling going on actively managed REIT funds naturally incur higher maintenance fees and higher expense ratios. Expense ratios on actively managed REIT funds are typically over 1%.
Passively managed REIT funds buy and hold shares according to a REIT index so very little buying and selling takes place throughout the year. Conversely, passively managed REIT funds have lower maintenance fees and expense ratios due to the fact that once the shares are purchased they are held long term. Expense ratios can be as low as 0.26%.
Redemption fees are something else you need to ask your financial advisor about. Redemption fees are charged to discourage investors from selling their shares often. Not all REIT fund managers charge redemption fees but the ones that do charge up to 1% if you hold your shares for less than a year.
You know that diversification is key when having a balanced portfolio. You and your financial advisor should plan on allocating 10 to 20 percent of you total holdings to REIT funds. While real estate can make you a lot of money, it is still a very tight market and should not be over invested in. Your portfolio should reflect this. Your financial advisor should ensure you are well diversified to minimize risk and loss.
There are also different types of accounts to hold your REIT fund in. Some pay out dividends that can be reinvested and won’t have tax implications and some pay out dividends quarterly. These accounts will have tax implications and you will have to report your capital gains on your tax return.
REIT mutual funds that hold these shares provide the diversification and income stability you need to secure your financial future. Ready to get the investing education you need to invest with confidence and learn more about investing in the markets, then start here.