There are more sources of income out there beyond Social Security and standard investments like stocks, bonds, and CDs. These alternative sources of income are not right for everybody, but they are always worth exploring to see if they fit you and your situation.
For example, one alternative source of income in retirement is real estate. Many retirees like the idea of owning or investing in real estate because of its appreciation potential. But buying and selling real estate can be extremely risky and beyond some people’s financial reach. Meanwhile, owning real estate and deriving income from, say, rent, can be extremely time consuming.
But there are other ways to use real estate for income. One method is through a Real Estate Investment Trust, or REIT.
A REIT is a company whose sole purpose is to own and/or operate income-producing real estate, such as apartments, shopping centers, offices, and warehouses. Some REITs engage in financing real estate. What makes REITs unique is the requirement that they pay at least 90% of their annual income to their shareholders. This payout can also include non-taxed income representing cash flow from depreciation.
As an investment, REITs offer a number of attractions. Foremost is the fact that public REIT shares trade on the stock exchange, giving investors liquidity with their real estate investments. They may buy and sell a diversified portfolio of properties, as well as the management, on an instantaneous basis.
REITs can also offer the security of owning real estate with a long life and the potential to produce income. When compared to owning public company bonds or dividend-paying stocks, payment of rents to an investor take priority over payment of bond interest and stock dividends.
Of course, like all investments, REITs come with risks, too. Their value can be less attractive when interest rates rise and other types of investments, like Treasury bonds, become more appealing. REITs can also be vulnerable to fluctuations in the economy. And since REIT dividends are taxed as ordinary income, they can have an adverse effect on your tax situation.
For these reasons, REITs aren’t right for everyone. But if you are interested in the idea of using real estate as an income source in retirement, they are always worth exploring, so let us know if you have any questions!