Scott Tominaga Explores Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a company structured to own, operate, or provide financing for income-producing real estate properties. These specialized entities, resembling mutual funds in structure, enable a collective pool of investors to contribute capital, Scott Tominaga explains. This collective investment approach grants individuals the opportunity to receive dividends generated from real estate holdings without the need to directly purchase, oversee, or fund any properties independently. By facilitating diversified real estate exposure and offering a passive income stream, REITs have become a popular vehicle for investors seeking to benefit from the real estate market without the challenges of property ownership.

Understanding the Mechanisms of REITs
Established by Congress in 1960 as an amendment to the Cigar Excise Tax Extension, Real Estate Investment Trusts (REITs) provide investors with the opportunity to own shares in diverse commercial real estate portfolios.
This accessibility was previously limited to affluent individuals and large financial intermediaries. REIT portfolios can encompass a variety of properties, including apartment complexes, data centers, healthcare facilities, hotels, infrastructure assets like fiber cables, cell towers, and energy pipelines, as well as office buildings, retail centers, self-storage units, timberland, and warehouses.

Typically, REITs focus on a particular real estate sector. Nonetheless, diversified and specialty REITs may feature various property types within their portfolios, such as a combination of office and retail properties.
Many REITs are publicly traded on major stock exchanges, allowing investors to trade them as they would stocks throughout the trading day. These publicly traded REITs often exhibit high trading volume and are regarded as highly liquid investment instruments, says Scott Tominaga.

Exploring the Advantages and Drawbacks of Investing in REITs
REITs play a significant role in investment portfolios by offering a stable annual dividend and potential long-term capital appreciation. Over the past 20 years, REITs have shown better total return performance compared to the S&P 500 Index, other indices, and inflation rates. However, like all investments, REITs come with their own set of pros and cons.
On the positive side, REITs are easily tradable on public exchanges, which helps mitigate the traditional challenges associated with real estate investments. They provide appealing risk-adjusted returns and consistent cash flow, notes Scott Tominaga. Having real estate exposure in a portfolio offers diversification and income through dividends that often surpass those from other investments.

Additionally, the Tax Cuts and Jobs Act of 2017 allows taxpayers to benefit from the qualified business income deduction, which includes a portion of qualified REIT dividends in the calculation. This deduction can be advantageous for investors.
Conversely, REITs may not offer substantial capital appreciation due to the requirement to distribute a large portion of income to investors. This limits the reinvestment amount for growth within the REIT. Furthermore, REIT dividends are taxed as regular income, and some REITs come with high management and transaction fees, adds Scott Tominaga.

Scott Tominaga is a professional in the hedge fund and financial services industry and is for all aspects of back-office operations daily, including investor relations and marketing. Learn more about Scott and his background in investment by visiting this page.