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Real Estate Investment Trusts (REITs) Let You Invest In Real Estate Without Owning Property, but Here Are The Downsides – NextAdvisor

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Dipping your toes into the real estate market sounds like a great idea on paper, but it takes lots of upfront capital. Then there’s the constant maintenance, the ever-changing housing market, and the responsibility of finding reliable tenants for your short- or long-term rentals. After adding up all the costs, you might decide that real estate investing isn’t as easy as you’d imagined.

One way to invest in real estate without owning properties is by way of REITs. Short for “Real Estate Investment Trusts,” REITs are sort of like mutual funds for real estate. REIT companies pool together money from hundreds or thousands of investors, then spend it on income-producing real estate ventures and share the profits.

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“There are a lot of ongoing costs when one owns real estate, and they’re getting some kind of income from that real estate,” says Omar Morillo, a certified financial planner and wealth advisor at Octavia Wealth Advisors in Miami, Florida. “A REIT offers a way to tap into the real estate market without undergoing all of those expenses.”

But REITs aren’t perfect. There are some downsides to consider. Read on to learn more about the pros and cons of REITs and whether you should add them to your investment portfolio: 

What Is a Real Estate Investment Trust

Imagine spending anywhere from $1,000 to $25,000 on REIT shares and in turn getting a new stream of income

That’s how things work with REITs. REITs are publicly traded or private companies that own, operate, and/or provide financing for real estate and assets that bring in income. The assets included in a REIT might include commercial buildings such as office spaces, hotels, self-storage facilities, warehouses, hospitals, data centers, cell towers, or residential apartment buildings. It’s common for REITs to be clustered according to sector or type—think industrial, healthcare, retail, or residential. There are even marijuana REITS. 

To qualify as a REIT, a company must check off a long list of criteria. This includes paying their shareholders at least 90% of their taxable income each year as dividends. Plus, they must invest at least 75% of all their assets in real estate assets and make at least three-fourths of their gross income from sources that are tied to real estate. The lion’s share (95%) of their gross income has to come from real estate sources and dividends. Last, no more than one-fourth of REITs’ assets can come from non-qualifying securities or stock in taxable REIT subsidiaries. 

How Do REITs Make Money?

REITs make money through their properties by either selling or leasing them. Instead of other real estate companies, which develop properties with the goal to sell them, the primary objective of a REIT is to develop properties, run them, and fold them into their own investment portfolio. Should property owned by a REIT appreciate in value, the owners provide shareholders with income in the form of dividends. 

Types of REITs

There are three main types of REITs:

  1. Equity REITs. These make up the majority of REITs. They usually own and operate real estate ventures that bring in rental income.
  2. Mortgage REITs. These REITs provide capital in the form of loans or mortgages to those who own real estate.
  3. Hybrid REITs. As the name implies, are a mix of both equity REITs and mortgage REITs.

There’s also a difference between a publicly-traded or privately-traded REIT: Privately traded REITs are also known as non-traded REITs, meaning they’re not traded on the stock exchange. Publicly traded REITs usually have smaller dividends. However, according to Morillo, publicly traded REITS provide greater transparency and higher liquidity than privately traded REITs.

“A common issue with the private REITs markets is that, unfortunately, some actors will do what I call ‘milking their REITs,’ ” says Morillo. “In other words, they’ll charge excessive fees and expenses because the REIT is obligated to distribute at least 90% of their profits back to the shareholders. But as long as those internal expenses are jacked up, then the shareholders don’t really get their fair due.” 

Pros and Cons of REITS

Let’s look at some of the advantages and downsides of REITs. 

Pros

REITs can be a good way to diversify your portfolio

If you have mutual funds that are invested in stocks and bonds, instead of going out and buying a rental property, REITs will give you a way to tap into that real estate industry, explains Niv Persaud, a CFP and managing director and founder of the Atlanta-based financial planning firm,  Transition Planning and Guidance.

REITs are tied to a tangible asset 

If you’re looking to earn some income from your portfolio, a REIT often seems like an attractive way of doing so. REITS are often easier, since you don’t have to go and acquire a property on your own, says Morillo. “You don’t have to play landlord and deal with the operations day to day, whether it’s an apartment building or hotel or retail,” he says. 

Cons

Market forces or economic conditions can impact income-earning potential

Because REITs are clustered by sector or type of property such as healthcare properties, retail, residential, or commercial, they can be impacted by an economic condition or state or local mandates because of their location. For example, in the middle of COVID-19, there were rental moratoriums where people weren’t paying their rental property. Meanwhile, healthcare tends to be less cyclical—so with some research and good diversification you can try to balance out unfavorable market conditions.

Non-traded REITs are fairly liquid 

The time horizon for REITs can be tricky. Publicly traded REITs are usually more liquid than private REITs, which can’t be sold very quickly. However, a best practice is to give yourself at least a few years before tapping into the money: “You need to act like this money doesn’t exist for a couple of years,” says Morillo. “There’s no turning around and trying to liquidate it in six months, because you had an emergency, or a year and a half from now because your daughter is getting married and you’re going to pay for the wedding.”

REITs are sensitive to interest rates

Just like any type of real estate you buy, REITs are tied to federal interest rates. “When the Federal Reserve says that they’re going to raise interest rates, a lot of times your REITs prices will fall,” says Persaud. Interest rates impact each type of REIT differently across industries and companies.

REITs are taxed as ordinary income

As Persaud explains, if you’re ready in a high tax bracket, then dividends from your REITs will be taxed as ordinary income. “But because REITs are part of your investment portfolio, your financial adviser will be able to manage some of the taxes,” says Persaud.

Should You Invest In REITs?

Not all REITs are the same. Know whether you’re most interested in residential, commercial healthcare, or retail REITs—and what risks are involved. Brush up on industry news and inquire about both local and federal regulations that might impact your ROI.

“For example, with retail REITs, if you look at how the market is, more people shop online than going into a retail store. You really want to understand what you’re investing in,” Persaud says. 

Like any financial move, Persaud recommends asking your financial advisor to recommend some REITs that would best fit in your portfolio.

And don’t get too swept up in the allure of passive income, says Morillo. Just because REITs generate income and pay annual dividends doesn’t make them risk-free.

Pro Tip

Investments that provide income aren’t necessarily less risky than other types of investments—always research fees, tax implications, and expected returns.

“People tend to have this point of view that because something pays income or dividends is less risky,” he says.

Weigh the pros and cons, and take a good look at the fees and costs involved. If you do decide to invest in REITs, keep the timeless adage, don’t put your eggs in one basket, in mind.

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Investment Statistics (10 Investment Statistics Investors Need To Know) – Forbes

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Understanding investment markets can be difficult, as there’s so much information to sort through. Fortunately, you don’t need to understand every single concept or piece of data to have success as an investor.

A few important, simple and often surprising investment statistics can guide your choices and make you a better investor in the long term. Here are a few worth considering.

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1. The Annual Return of the S&P 500 (10% Per Year)

The stock market has been a consistent way to build wealth over the past 100 years. Likewise, from April 1, 1936 through March 31, 2024, the S&P 500 Index–a widely followed barometer for the broad U.S. stock market–averaged an annual return of 10.75%.

To put that return into perspective, if you earn 10% per year on your savings, and your gains compound quarterly, you’ll double your money roughly every seven years. Put $20,000 in an S&P 500 fund today, and if you earn the historical return of 10% per year, you’ll have $40,000 in about seven years.

Of course, the stock market is unpredictable and goes through swings. Your portfolio might go down some years and up by more than 10% in others. The key takeaway is that the stock market posts a substantial average annual return over time.

2. The Average Annual Inflation Rate (3.8% Per Year)

Inflation is another reason why it’s essential to invest. When prices go up, the purchasing power of each of your dollars goes down. On average, U.S. inflation has been 3.8% percent per year from 1960 to 2022. If you aren’t earning at least that much on your money, it’s losing value. Your balance might stay the same in a bank account, but it buys less and less, making you poorer.

Investments like stocks historically outperform inflation. By investing some of your money in stocks and stock funds, your savings and spending power can keep up with rising prices.

3. The Number of Active Day Traders Who Lose Money (80%)

Using an index fund, you can often match the performance of the entire S&P 500 and various major stock markets. This is different from buying and selling–or trading–individual stocks. Trading individual stocks can be exciting when it succeeds, leading sometimes to sharp short-term gains, but profiting consistently is very hard.

In fact, 75% of day traders trying to invest professionally quit within two years, and 80% of their trades are unprofitable, according to a University of Berkeley study. And individual stock day traders working through a taxable account often generate short-term capital gains, which are taxed at higher ordinary income rates than long-term capital gains. Day traders can also trigger a lot of investment fees. Also, as a day trader you’re competing against the best professional investors on Wall Street, many backed by big research teams.

Most regular investors are better off using mutual funds and exchange-traded funds, or ETFs, that aim to match the stock market instead. It’s less exciting but still lucrative in the long term.

4. The Cost of an Index Fund vs. an Active Fund for a $1 Million Portfolio ($1,200 vs. $6,000 Per Year)

If you’re trying to pick an investment fund, consider the cost. An index fund keeps costs low by simply trying to mimic the performance of a specific segment of the market. The S&P 500 is one. It consists of 500 of the largest companies listed on U.S. stock exchanges. The Nasdaq 100 consists of stocks issued by 100 of the largest nonfinancial businesses listed on the Nasdaq stock exchange.

Many index funds track each of those groups. Generally, their costs are kept low because they don’t have to pay for lots of investors, analysts and software wizards to find stocks. In contrast, actively managed funds do pay for talented people who can pick stocks that outperform. Those costs get passed on to shareholders like you.

Index funds, on average, charge 0.12% per year versus the 0.60% charged by active investment funds. That means on a $1 million portfolio, you’d pay $1,200 per year for an index fund versus $6,000 a year for an active fund.

Despite charging much more, 79% of active funds, trying to earn higher returns, underperformed the S&P 500 in 2021. Often, you’re paying extra fees for actively managed funds without getting any additional return in exchange.

5. The Average Length of a Bear Market (14 Months)

One drawback to investing is that your returns are not guaranteed. In some years you’ll earn a lot. In others, your portfolio could lose money. It’s not fun to lose money, but during this stretch, remind yourself that the market will turn around eventually.

The average historical bear market, a period when stocks are losing value, has lasted 14 months. On the other hand, the average historical bull market, when stocks go up in value, has lasted five years.

The market will go through cycles of gains and losses. Remember that the positive stretches last longer than the negative ones.

6. The Number of ‘Best Investing Days’ That Can Turn a Positive Portfolio Negative If Missed (20 Days Over Two Decades)

When the market crashes, you might feel tempted to cash out and wait until things start picking up again. This is one of the most expensive mistakes investors make.

Why is that? Because so much of the stock market’s long-term returns come from single-day gains. The market sometimes shoots up by 5%, 7% or even 10% in a single day. Those days are impossible to predict. And they often occur at the start of a rally.

Individual retail investors often miss those explosive, unexpected upturns because they cashed out or moved to bonds amid the market’s earlier downturn.

A JPMorgan report found that if investors missed the top 10 best days of investing over a two-decade period from January 1999 to December 2018, it cut their portfolio return in half. If investors missed the top 20 best investing days, their return turned negative, meaning that they lost money over that two-decade period. Don’t try to time the market. Stay invested for the long term for the best results.

7. The Monthly Investment Needed to Reach $1 Million If You Start at Age 25 vs. Age 45 ($350 vs. $1,650)

The earlier you start investing, the more time you have to build wealth. This makes it easier to hit your long-term financial goals.

Let’s say you want $1 million in your nest egg for retirement at age 67. You expect to earn 7% a year, a reasonable return for a portfolio of stocks and bonds. If you start at age 25, you would need to save about $350 per month. If you start at age 45, you must save around $1,650 a month.

If you’re still early in your career, consider ways to save more money. Even a little extra today will make reaching your future financial goals easier. Don’t get discouraged if you are later in your career. You may wish you had started earlier, but anything you put aside now will help you once you retire. As the saying goes, perhaps the best time to start was years ago, but the second-best is now.

8. The Number of People With a Workplace Retirement Plan (44%)

A workplace retirement plan, like a 401(k), can help you invest. Those plans let you save money and defer yearly tax on growth in your investments inside your account. With a traditional 401(k), you also get a tax deduction for the money you kick into your account. In most cases, your employer also contributes to your account.

Only 44% of American workers have access to a workplace retirement plan. If you have one, study how it works to take full advantage.

The majority of workers, 56%, do not have a retirement plan at their job. Consider an individual retirement account, or IRA, if you are in that situation. It offers similar tax advantages for your retirement savings and investment goals.

9. The Expected Life Expectancy of Males and Females Turning 65 (82 and 85 Years)

The top reason most people invest is to save for retirement. And retirement might last a lot longer than you expect. The typical male turning 65 today is expected to live until 82, while females are expected to live until 85, according to the Social Security Administration.

That is a retirement lasting an average of nearly two decades. Some people will live even longer, reaching 90, 100 or even older. This is why saving and investing regularly is important—to build extra savings to fund your retirement lifestyle.

10. The Average Baby Boomer 401(k) Balance ($230,900)

Fidelity measured the average 401(k) balance by age of its customers. This can give you an idea of where your savings stack up against your peers:

  • Gen Z: $9,800
  • Millennials: $54,000
  • Gen X: $165,300
  • Baby Boomers: $230,900

This represents investments in a 401(k). People may have more money in an IRA or other investment account. Still, those figures show that the typical person does not retire with $1 million. Therefore, you shouldn’t feel behind if you’re just starting to save for retirement. Do what you can to beat these averages and grow your portfolio.

Hopefully, these statistics help shed some light on the importance of investing and investing wisely. Consider meeting with a financial advisor to discuss your portfolio for more advice.

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Deutsche Bank's Investment Bankers Step Up as Rate Boost Fades – Yahoo Canada Finance

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(Bloomberg) — Deutsche Bank AG relied on its traders and investment bankers to make up for a slowdown in income from lending, as Chief Executive Officer Christian Sewing seeks to deliver on an ambitious revenue goal.

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Fixed income trading rose 7% in the first quarter, more than analysts had expected and better than most of the biggest US investment banks. Income from advising on deals and stock and bond sales jumped 54%.

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Revenue for the group rose about 1% as the prospect of falling interest rates hurt the corporate bank and the private bank that houses the retail business.

Sewing has vowed to improve profitability and lift revenue to €30 billion this year, a goal some analysts view with skepticism as the end of the rapid rate increases weighs on revenue from lending. In the role for six years, the CEO is cutting thousands of jobs in the back office to curb costs while building out the advisory business with last year’s purchase of Numis Corp. to boost fee income.

“We are very pleased” with the investment bank, Chief Financial Officer James von Moltke said in an interview with Bloomberg TV. The trends of the first quarter “have continued into April,” he said, including “a slower macro environment” that’s being offset by “momentum in credit” and emerging markets.

While traders and investment bankers did well, revenue at the corporate bank declined 5% on lower net interest income. Private bank revenue fell about 2%. Both units benefited when central banks raised interest rates over the past two years, allowing them to charge more for loans while still paying relatively little for deposits.

With inflation slowing and interest rates set to fall again, that effect is reversing, though markets have scaled back expectations for how quickly and how deep central banks are likely to cut. That’s lifted shares of Europe’s lenders recently, with Deutsche Bank gaining 25% this year.

“Deutsche Bank reported a reasonable set of results,” analysts Thomas Hallett and Andrew Stimpson at KBW wrote in a note. “The investment bank performed well while the corporate bank and asset management underperformed.”

–With assistance from Macarena Muñoz and Oliver Crook.

(Updates with CFO comments in fifth paragraph.)

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©2024 Bloomberg L.P.

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How Can I Invest in Eco-friendly Companies? – CB – CanadianBusiness.com

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Welcome to CB’s personal-finance advice column, Make It Make Sense, where each month experts answer reader questions on complex investment and personal-finance topics and break them down in terms we can all understand. This month, Damir Alnsour, a lead advisor and portfolio manager at money-management platform Wealthsimple, tackles eco-friendly investments. Have a question about your finances? Send it to [email protected].


Q: It’s Earth Month! And… there’s a climate crisis. How can I invest in companies and portfolios funding causes I believe in?

Earth Day may have been introduced in 1970, but today it’s more relevant than ever: In a 2023 survey, 72 per cent of Canadians said they were worried about climate change. Along with carpooling, ditching single-use plastics and composting, you can celebrate Earth Month this year by greening your investment portfolio.

Green investing, or buying shares in projects, companies, or funds that are committed to environmental sustainability, is an excellent way to support projects and businesses that reflect your passions and lifestyle choices. It’s growing in favour among Canadian investors, but there are some considerations investors should be mindful of. Let’s review some green investing options and what to look out for.

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Green Bonds

Green bonds are a fixed-income instrument where the proceeds are put toward climate-related purposes. In 2022, the Canadian government launched its first Green Bond Framework, which saw strong demand from domestic and global investors. This resulted in a record $11 billion green bonds being sold. One warning: Because it’s a smaller market, green bonds tend to be less liquid than many other investments.

It’s also important to note that a “green” designation can mean a lot of different things. And they’re not always all that environmentally-guided. Some companies use broad, vague terms to explain how the funds will be used, and they end up using the money they raised with the bond sale to pay for other corporate needs that aren’t necessarily eco-friendly. There’s also the practice of “greenwashing,” labelling investments as “green” for marketing campaigns without actually doing the hard work required to improve their environmental footprint.

To make things more challenging, funds and asset managers themselves can partake in greenwashing. Many funds that purport to be socially responsible still hold oil and gas stocks, just fewer of them than other funds. Or they own shares of the “least problematic” of the oil and gas companies, thereby touting emission reductions without clearly disclosing the extent of those improvements. As with any type of investing, it’s important to do your research and understand exactly what you’re investing in.

Socially Responsible Investing (SRI) and Impact Investing

SRI and impact investing portfolios hold a mix of stocks and bonds that are intended to put your money towards projects and companies that work to advance progressive social outcomes or address a social issue—i.e., investing in companies that don’t wreak havoc on society. They can include companies promoting sustainable growth, diverse workforces and equitable hiring practices.

The main difference between the two approaches is that SRI uses a measurable criteria to qualify or disqualify companies as socially responsible, while impact investing typically aims to help an enterprise produce some social or environmental benefit.

Related: Climate Change Is Influencing How Young People Invest Their Money

Some financial institutions use the two approaches to build well-diversified, low-cost, socially responsible portfolios that align with most clients’ environmental and societal preferences. That said, not all portfolios are constructed with the same care. As with evaluating green bonds, it’s important to remember that a company or fund having an SRI designation or saying it partakes in impact investing is subjective. There’s always a risk of not knowing exactly where and with whom the money is being invested.

All three of these options are good reminders that, even though you may feel helpless to enact environmental or social change in the face of larger systemic issues, your choices can still support the well-being of society and the planet. So, if you have extra funds this April (maybe from your tax return?), green or social investing are solid options. As long as you do thorough research and understand some of the limitations, you’re sure to find investments that are both good for the world and your finances.

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