A solid retirement portfolio needs more than a selection of stocks and bonds, and the best retirement portfolio assets offer considerable stability and a historical track record of weathering economic shifts.
Real estate is generally understood to be a solid investment and diversification tool for retirement portfolios. Real estate can offer a slow, predictable return rate over the longer term and can be a great way to build wealth. Some real estate investments can provide additional passive income and tax benefits, which are ideal for a retirement portfolio or retired individuals.
What is a REIT
A Real Estate Investment Trust (or REIT) is a corporation that owns and operates income-producing real estate or real estate assets on behalf of shareholders. Modeled after mutual funds, REITs pool the combined funds from shareholders and creates and supports a portfolio of investment properties.
Until recently, high net worth individuals and large financial institutions were the only investors able to access REITs. In 2012, REITs opened up and were made available to individual investors with the REIT Act’s passage. REITs provide investors with options to diversify their portfolios and access to income-producing assets they couldn’t afford independently.
There are currently over 200 REITs registered with the Securities and Exchange Commission (SEC). To qualify as a REIT, the company must:
- Earn at least 75% of its income from rental income or other real estate activities
- Have 75% of assets in real estate
- Have at least 100 shareholders
- Be no more than 50% owned by five or fewer individuals
- Pay at least 90% of its net income as dividends
What type of REIT is best for retirement?
All REITs aren’t created equal, provide access to individual investors, or even invest in the same types of properties.
REITs can specialize in land, multifamily housing, office, hotels, or other kinds of real estate. REITs may also include mortgages or mortgage securities tied to the properties.
In addition to asset specialization, different REITs structures dictate how to invest, and whether individual investors looking to diversify their retirement portfolios can qualify as investors.
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| Private REITs |
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| Public Non-Traded REITs (like Upside Avenue) |
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Why add a REIT to your retirement portfolio?
There are several benefits of adding a REIT to your retirement portfolio. They can provide income, capital appreciation, diversification, inflation protection and could be considered passive investments – meaning you don’t need to manage tenants or collect rent from realizing returns on your investment.
1. REITs pay dividends
The tax code incentivizes REITs to pay larger dividends. REITs don’t pay corporate tax at the federal level (currently at 21%) as long as they distribute at least 90% of their taxable income to their investors as dividends.
2. REITs can help offset inflation impacts
Over time, inflation can strip traditional retirement portfolio assets of their buying power as products and services increase in cost. It can be challenging to stay ahead of inflation impacts as a retiree, especially with fixed income securities.
According to NAREIT, because rents from real estate tend to increase when prices do, a REIT can offer a form of inflation resistance to investors and soften the overall impact.
As of December 2018, REITs have shown to be more inflation-resistant than the S&P 500 Index and Barclays Capital U.S. Aggregate Index.
3. REITs can diversify a retirement portfolio
Financial advisors tell clients that diversifying their retirement portfolios with real estate investments is a more effective way to reduce or temper risk. Investing in a REIT with a deep portfolio of real estate assets is one way to put that advice into action.
According to Fidelity, REITs provide diversification benefits to multi-asset-class portfolios. “During the past 20 years, an allocation to REIT stocks would have boosted the risk-adjusted returns of a portfolio including U.S. stocks and investment-grade bonds.”
4. REITs offer passive income during retirement
Retirees don’t need to liquidate their REIT holdings to receive income from their REIT investment.
Besides other kinds of income-producing investments like dividend stocks and bonds that pay interest, dividends from a REIT can provide income for retirees to spend or reinvest.
REITs are required to pay out 90% of their taxable income to investors, and most income distributed from REITs is taxed as ordinary income rather than dividend income, making an investment in REIT even more attractive.
5. REITs offer tax benefits
Distributions from a REIT fall into two different classifications.
- Ordinary Income. This is the portion of REIT distributions that are taxable on a 1099-DIV form. They represent operating profits.
- Return of Capital. This is the portion of REIT distributions that are NOT treated as taxable income to shareholders on a 1099-DIV form. This happens when the REITs current distributions exceed its earnings.
REITs can provide tax-deferred income due to depreciation of a property or a portfolio of properties. If the depreciation is large enough, the taxable portion of investor distributions will likely decrease (ordinary income), not overall distributions, just the taxable distributions.
Alternative funding with after-tax investment accounts
If an investor has an after-tax retirement account such as a Roth IRA or SDIRA, they can direct and fund their investment in a public non-traded REIT (like Upside Avenue) with funds held in these accounts.
Traditional IRAs and 401(k)s limit your choices regarding investing in retirement assets and are generally managed by a company or plan provider who selects the investment assets included in the plan.
Investing in a REIT using a funding source like an SDIRA can provide investors with portfolio diversification while using the funding sources currently available to them. Diversification can give stability, reduce overall risk, and place control with the individual investor instead of relying on a plan to make decisions.
Including real estate in your retirement plan and retirement portfolio can provide diversification and offer a slower (but more predictable) return rate. When that investment is with a REIT, the benefits become even more remarkable; from tax benefits, alternative funding options, and even passive income, a REIT could be a highly beneficial addition to any retirement portfolio.
About Upside Avenue
For decades, the ultra-wealthy and financial institutions have been putting their money to work in real estate—now with Upside Avenue, you can too. We provide access to a professionally managed, diversified portfolio of income-producing multifamily real estate for as little as $2,000. Learn more about the Upside Avenue’s multifamily REIT with targeted returns of 10-15% IRR*.
*Averaged over a 3+ year hold. Historical performance does not guarantee future returns. All investments involve risk, including losing some or all of your investment. Please read our Offering Circular on the SEC website in full before considering an investment.
