REITs on TD Ameritrade

Real estate exposure through real estate investment trusts (REITs) can be a nice addition to any diversified portfolio, adding extra protection during times of inflation while also providing steady income and equity-like performance. REITs are an easy way to add real estate exposure to your portfolio as they are fairly liquid and trade just like public stocks. This article will go over the different types of REITs and how you can add these to your TD Ameritrade account.

What Are REITs?

REITs take the capital raised from investors and buy various types of properties, mostly commercial, but also residential, and then lease them out to tenants in exchange for rent payments. Most REITs will specialize in leasing out a specific type of property, such as commercial office space, residential buildings, retail space, or industrial warehouses. The rental income received from tenants, as well as any capital gains made from the sale of properties held by the REIT, are then passed through to the shareholders as regular (usually monthly or quarterly) dividends. Next, we’ll take a closer look at a few of the major types of REIT properties and what makes them unique.

Retail REITs

One of the biggest categories of REITs are those that lease out space to retail businesses like clothing stores, grocery stores, home improvement stores, etc. The ability of these tenants to pay their rent (and therefore for the investor to get their dividends) is highly dependent on them reaching their sales targets. You want to invest in REITs that have strong anchor tenants with consistent earnings. Leasing out space to less established retailers is risky because if they are unable to pay the rent it can take some time for the REIT to identify a new tenant to fill their spot.

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Office REITs

Another popular REIT category is Office REITs, which invest in commercial office space, usually in large cities. When investing in one of these REITs, the important things to consider are the cities where the REIT owns office space and the companies they are leasing to. It’s important that the REIT’s properties are located in economically strong cities, such as Boston, Washington D.C., and Seattle for example. These leases are generally long term, so you want to make sure that a good portion of the tenant companies are established, profitable businesses.

Hotel and Hospitality REITs

Hotel and Hospitality REITs own hotels and resort condominiums and generally hire a hospitality company to oversee the day to day operations of their properties. The ability of these REITs to pay dividends depends on the desirability of their hotels and their occupancy rates. When investing in these REITs, one of the biggest risks is during economic downturns as vacations are one of the first things people cut from their budget when money is tight. Therefore, it’s important that the REIT own hotels in highly desirable locations that are less impacted by economic downturns.

Researching Different REITs on TD Ameritrade

If you use Ameritrade’s stock screener and filter by the real estate sector, you will see that they currently offer more than 400 REITs to choose from. This selection can be narrowed down even further to focus on specific property types, such as REITs that own hotels and resorts or REITs that lease out office space.


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After we ran this screen for Hotel & Resort REITs, one security in particular caught our eye – Ashford Hospitality Trust Inc. (AHT). This hospitality REIT is on the smaller size with a market cap of just over half a billion. The trust’s holdings consist of 121 upscale hotels and condominiums with more than 25,000 rooms throughout the U.S. The REIT currently offers a 9.3% dividend yield, which is impressive when compared to an average of ~3% for most Hotel & Resort REITs.


Tax Advantages of Investing in REITs

From a tax perspective, REITs are also an attractive investment. Most REITs in the U.S. are exempt from paying taxes at the trust level so long as they distribute at least 90% of their income as dividends to shareholders. That means that, unlike a typical corporation, our hospitality REIT is not paying income taxes on the income it receives from its various hotels and condominium units that it rents out to vacationers.

Instead, this income is first used to cover any operating expenses, such as maintenance and upkeep of the REIT’s properties, and the remaining cash is untaxed and passed through to shareholders as dividends. As a REIT shareholder, you would still be subject to paying ordinary income tax on the dividends you receive. But overall, this is a win-win situation for the REIT and its shareholders because the cash flow is generally only being taxed once, whereas any other corporation’s dividend payments are taxed twice – once when the business’ income is taxed and then again when the shareholder pays taxes on the dividends they receive.

Buying REITs on TD Ameritrade Summary

In summary, REITs are a good addition to most diversified portfolios because they offer inflation protection, steady income, tax advantages, and equity-like returns. They are an easy way to gain exposure to real estate, and the variety of REITs out there today make it easy to choose from both diversified REITs and ones that specialize in a specific type of property. When researching which REIT(s) to buy, investors should research the financial conditions of their largest tenants and consider the unique factors that affect different types of tenants.

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