Real Estate Investment Trusts (REITs)

What are REITs?

Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio.

Why would somebody invest in REITs?

REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to go out and buy commercial real estate.

What types of REITs are there?

Many REITs are registered with the SEC and are publicly traded on a stock exchange. These are known as publicly traded REITs. Others may be registered with the SEC but are not publicly traded. These are known as non- traded REITs (also known as non-exchange traded REITs). This is one of the most important distinctions among the various kinds of REITs. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you.

What are the benefits and risks of REITs?

REITs offer a way to include real estate in one’s investment portfolio. Additionally, some REITs may offer higher dividend yields than some other investments.

But there are some risks, especially with non-exchange traded REITs. Because they do not trade on a stock exchange, non-traded REITs involve special risks:

Lack of Liquidity: Non-traded REITs are illiquid investments. They generally cannot be sold readily on the open market. If you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT.
Share Value Transparency: While the market price of a publicly traded REIT is readily accessible, it can be difficult to determine the value of a share of a non-traded REIT. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes. This may be years after you have made your investment. As a result, for a significant time period you may be unable to assess the value of your non-traded REIT investment and its volatility.

Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. Unlike publicly traded REITs, however, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and the cash available to the company to purchase additional assets.

Conflicts of Interest: Non-traded REITs typically have an external manager instead of their own employees. This can lead to potential conflicts of interests with shareholders. For example, the REIT may pay the external manager significant fees based on the amount of property acquisitions and assets under management. These fee incentives may not necessarily align with the interests of shareholders.

How to buy and sell REITs?

You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.

Understanding fees and taxes:

Publicly traded REITs can be purchased through a broker. Generally, you can purchase the common stock, preferred stock, or debt security of a publicly traded REIT. Brokerage fees will apply.

Non-traded REITs are typically sold by a broker or financial adviser. Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount.

Special Tax Considerations:

Most REITS pay out at least 100 percent of their taxable income to their shareholders. The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. Consider consulting your tax adviser before investing in REITs.

Avoiding fraud:

Be wary of any person who attempts to sell REITs that are not registered with the SEC.

You can verify the registration of both publicly traded and non-traded REITs through the SEC’s EDGAR system. You can also use EDGAR to review a REIT’s annual and quarterly reports as well as any offering prospectus.

Great luck and we wish you success in building passive income for you and your family.

MORTGAGES
10-Year Mortgage Rates

10-year fixed-rate mortgages typically have lower rates but higher monthly payments compared with other loans. Rates change over time, so it is important to compare rates periodically to find the most affordable mortgage.

When buying a home, you have a choice of a number of different mortgage rates and terms. Most home buyers spread their mortgage payments over multiple decades, but if you want to pay off your home more quickly, a 10-year fixed-rate mortgage may be right for you.

10-year fixed-rate mortgages typically have lower interest rates than other loans because of their shorter repayment timeline. Each payment remains the same for the life of the loan, and payments are calculated so that the loan is paid off one decade after the homeowner first borrows the money.

Whether you can qualify for a 10-year mortgage or not, as well as your rate, will depend on your financial situation. This guide will review your options and help you to determine if a 10-year mortgage is right for you.

Mortgage Rates Over Time

Mortgage rates can go up or down over time. Here’s how mortgage rates have changed over time.

What is a 10-Year Fixed-Rate Mortgage?

A 10-year fixed-rate mortgage is a mortgage loan repaid over a decade. When you take out a 10-year loan, your principal and interest payments are calculated to ensure that you will have repaid the entire loan balance by the end of the loan term.

Your payments never change for the entire life of the loan, unlike an adjustable-rate mortgage, and you will own your home free-and-clear after 10 just years.

Does a 10-Year Fixed-Rate Mortgage Make Sense for Me?

A 10-year fixed-rate mortgage is a good option for you if you want to pay back your loan as soon as possible and minimize your interest costs. 10-year mortgages generally have lower interest rates than their more common 15-year or 30-year loan counterparts.

They might also be a good option if you already own your home and you want to refinance your mortgage lower your monthly interest rate.  However, you must be able to qualify for a 10-year mortgage. When you apply for a home loan, lenders consider your debt-to-income ratio. This compares your monthly debt payments, including your mortgage, to your income.

The payment on a 10-year mortgage is going to be much higher than on a 15-year or 30-year mortgage because you have to pay the loan over a much shorter time period.

This means your income will need to be high enough or your house cheap enough that this short-term mortgage is considered affordable and your debt-to-income ratio isn’t pushed too high.

Benefits of 10-Year Fixed Mortgage Rates:

There are some significant benefits to 10-year fixed-rate loans:

  • 10-year mortgage rates are lower than with longer mortgage terms.
  • In addition to lower rates, your debt will be subject to interest for a much shorter amount of time.
  • You’ll own your home much sooner than with a longer mortgage.

Downsides of 10-Year Fixed Mortgage Rates:

There are also some big downsides to 10-year fixed-rate mortgages, including:

  • Higher monthly payments.
  • Loans may be harder to qualify for if the higher payments make your debt-to-income ratio too high.
  • There’s an opportunity cost—you can’t do other things with your money, such as investing, if you’re making much higher mortgage payments.

10-Year Mortgage vs 30-Year Mortgage

The table below shows how the key differences between a 10-year mortgage and a 30-year mortgage, which is a much more common type of loan among home buyers.

This example shows not just how much more you’d pay each month, but also how much you’d save in total if you opt for a shorter mortgage.

However, you’ll want to compare loan terms yourself based on the loan you qualify for. Our mortgage calculator can help you understand how much different loan amounts and terms would cost you.

When deciding if you can afford a 10-year mortgage, don’t forget you’ll have additional housing costs to pay. This could include:

Private mortgage insurance (PMI) if your down payment is less than 20%
Property taxes Homeowner’s Association (HOA) fees Routine maintenance costs.

Where Can I Find the Best 10-Year Mortgage Rates?

Whether you’re buying or refinancing, you should always compare rates from multiple lenders. Mortgage rates are based not just on prevailing rates, but also on factors specific to you, such as your credit score, income, the area you’re buying, and the value of the home you want.

You should ask for quotes from a few of the best mortgage lenders to see who offers you the most favorable terms.

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