AReal Estate Investment Trustis a company that purchases real estate to make a regular income.REITs give small investors access to income producing property assets.Much like mutual funds that deliver access to diversified stocks.In the same way,REITs must provide distributions to their investors.

REITs offer diverse portfolios that consist of many different types of real estate.This makes them appeal to more conservative investors.Typically,portfolios can include private and commercial properties such as:

The investment firm can profit from their property assets in many ways.As an example,they can make an income through occupancy rates or financing repayments.They can rent,lease,or sell their properties.Then,the company distributes their earnings to investors.Due to the broad range of funds sourced by the REIT,estimating the tax liability from the distributions can be complicated.The type of account the earnings go into,whether taxable or tax-deferred,can further influence your tax implications,along with your annual income.

Using this calculator on this page,you can quickly evaluate the tax equivalent distributions(TED)between a taxable portfolio and retirement account,so you can make a reasonable decision about your investment.

Due to growing rental prices and the appreciation of real estate in many regions,these types of investments tend to be more insulated from market fluctuations.The variables that may impact stocks usually don’t affect REITs.This can be attractive to individuals that want to use their retirement savings for their investment.

There are many tax advantages to owning REITs inside retirement accounts such as401(K),403(b),or457 plans.These types of account offset the rules surrounding REITs in taxable accounts because of the way these accounts are structured.

Using this calculator you can examine the tax equivalent distributions of investments from qualified pension plan.

Given the tax liabilities,REITs tend to receive more advantages in retirement accounts.However,REITs can still provide a good investment opportunity for investors using an ordinary savings plan.The returns would be limited,when compared to tax-deferred plans,but could be good option to diversify your portfolio.Individuals producing less income or with simpler taxation affairs may benefit more from using a taxable investment,than high income producing investors.

REITS source their income from many different sources.Due to this,earnings can be subject tovarying levels of taxation.Tax is highly dependent on the structure of the investment and how the distributions are declared.

Legally,REITs have to pay out 90%of their taxable income to their investors in the form of dividends.REITs are given a special tax designation to reduce their corporate taxes and are not treated in the same way as stocks,which also pay out dividends.Since REITs are not taxed at the corporate level,much of the burden falls on the shareholder.

Distributions are typically a mix of ordinary income,capital gains,and a return of capital.Each type of distribution is taxed differently.Each year,investors will receive a tax form(1099-DIV)that puts their distributions into different categories.Let us review how to complete this form together.

Ordinary dividends/income:marked in box 1a of the 1099-DIV tax form.As mentioned before,REITs pass much of their tax obligation on to their investors.The majority of dividends will be treated as ordinary income.This part of the earnings will be taxed at yourmarginal income rate,minus any qualified dividends.

Qualified dividends:marked in box 1b of the 1099-DIV tax form.When the remainder of earnings from a REIT are taxed,an after-tax portion can get distributed to its shareholders as a qualified dividend.This profit needs to be subtracted from your ordinary income to estimate taxes accurately.Qualified dividends are given a preferential tax rate of15%.

As an example,box 1a reports $500 while box 1b reports $300.The $300 is taxed at 15%,but the remaining $200($500-$300 equals $200)is taxed at your marginal rate.

Capital gains:marked in box 2b of the 1099-DIV tax form.When you decide to sell your shares,any profits you gained from the sale will be listed here.The tax rate of your earnings depends on how long you held the asset with the REIT.Securities held for less than a year are taxed at yourregular income tax rate.Meanwhile,assets held longer than a year receive a tax break at15%or 23.8%depending on your annual income.

Return of capital:marked on box 3 of the 1099-DIV tax form.A REIT can sell an asset,for instance,a medical complex.When this happens,they can reinvest your capital in another property or return part of your investment.Proceeds that are returned lessen the cost basis of your shares and arenot taxed.

For example,box 3 shows a return on capital of $2 per share.It reduces the initial cost basis of your shares by that amount.If you had paid 8$ per share,your new cost basis would be 6$ per share.When you eventually sell your shares,you have to pay capital gains on your profits.

Remember to bookmark this page to the home screen of your smartphone or tablet to have this great tool at your fingertips.If you found this page useful,you can promote us on social media by using the share feature.With your help,your friends and family can maximize their REIT earnings.

The REIT tax equivalent calculator is very easy to use.It is made up of two parts:an information section,and a results section.The accuracy of your results can vary based on the information you provide.Let’s go over this together,starting with your distributions.

Step 1:On the first line of the calculator you should document your REIT distribution before taxes.This is your annual rate of return on your investment.

Step 2:Then,identify what portion of your distribution is a return of capital.You can use the arrow functions to make even this easier.

Step 3:On the next line of the calculator you should add your estimated taxable annual income.This is your income after any deductions to get your marginal tax rate.

Step 4:Finally,please select your federal tax filing status from the choices provided.

Step 5:Please proceed to your results.

Once your information is added to the calculator,the system will generate a report for you.There are different smart prompts and graphs to show you the tax equivalent distributions.

To the right of the information,fields is a prompt highlighting your income tax rate.A significant portion of your investment can be taxed at this rate when the REIT is in a taxable account.

Below the data inputs,is another prompt comparing the distributions.Here we illustrate the difference between a taxable and non-taxable account.You can view what rate of return will provide equal benefit between the accounts.For example,if you receive a 6%return to a taxable account,the profits would be comparable to making a 7.25%return using taxable capital.

There is a graph displaying your tax equivalent distributions as well.You can see your distribution before taxes in green,next to the value after taxes in blue.The red shows you what return is required from a fully taxable investment.This means receiving a 7.25%return on a taxable account can result in 5.5%net profits when your annual income is $100,000.

With this information you can decide which source of capital is a better investment based on your current taxation affairs.

• ✔ How to figure out your net operating income (NOI), which is the total income that the property can generate.
• ✔ How to work out your cash flow, which is your yearly earnings after debt costs.
• ✔ Two ways to calculate the annualized return on your investment.
• ✔ An example financial analysis of an investment property.

Net Operating Income

To figure out a property'sNOI,you have to take the income generated by the rental minus its expenses(not including loan costs).

• NOI=income – expenses

Financing offers can change between lenders(and properties!),so it's imperative to analyze the investment before your financing needs. This simple calculation will help you compare real estate options equally.

• Income generated:

Income can come from various sources such as tenant rent, parking, or use of other facilities (laundry, storefront, etc).

• Expenses:

Expenses can come in many forms. Common expenses can be broken down into property taxes, HOA fees, maintenance, insurance, and management costs (property manager or advertising).

It goes without saying that when a property has higher expenses, it’s potential for income drops.

Cash Flow

If you buy the home using cash, your NOI and cash flow will be the same. But in most cases, investors need a mortgage. If this is the case for you, you’ll have to adjust your cash flow based on your loan expenses.

• Cash flow = NOI – Debt costs


• Debt cost typically refers to your mortgage payments for the year.

As you get a larger loan amount or higher interest rate, you will have less cash flow and smaller returns on your investment. Now, you can figure out your annual rate of return.

Annual returns

The most straightforward way to gauge your returns is to divide the NOI by the price of the property. This is called the cap rate, and it's important because it measures the performance of the investment independent of your financing.

• Cap rate=NOI/Purchase price of home x 100.

To account for your ROI when you have a loan,you can use the total ROI formula.

• Total ROI=cash flow/initial investment x 100

This type of ROI is useful because it takes into account the loan service costs,and as such,can be the most accurate measure of your returns.

While only you can decide on a fair rate of return,it’s typically only worth investing in real estate if you are making more than 10%.Otherwise,you can invest in stocks and get the similar results with less effort.

Let's imagine an investor that wants to buy a fourplex. The property is listed for $350k in Coconut Grove, FL. The investor has to pay $70,000 (20%) as the down payment, plus an extra $30,000 for closing costs and improvements. Therefore, the investor’s initial investment will be $100,000. The units in the fourplex rent out for $1,000 each, while each parking space rents for $150. Do you think this would make a good investment?

• NOI: If all four units are occupied the property can make $4,000 per month (and $48,000 per year) solely on tenants. If all the parking spots are rented, that brings an extra $7,200 a year, raising the total income potential to $55,200

  When it comes to expenses, this hypothetical property consumes about $11,900 per year. [Insurance: $2,000, Maintenance: $5,000, Property taxes: $5,300, HOA: $900. Utilities and Internet: $5,000]

  Therefore, Income ($55,200) – Expenses ($11,900) = NOI ($43,300)

• Cash flow: The yearly cost of a $280k mortgage at 4% is $17,724

So, NOI ($43,400) – Debt costs ($17,724) creates a cash flow of $25,576. That means this investor could see net earnings of $25,576 from this investment each year.

• Cap Rate: To figure out the cap rate we have to divide the NOI ($43,300) by the purchase price of the home ($350,000) x 100.

  In this example, the cap rate is 12.3%. In many areas of the US, 12% is a reasonable cap rate for an investment property.

• Total ROI: Earlier, we figured out the cash flow to be $25,576 per year. We have to divide that by the initial investment ($100k) times 100.

  That means the total ROI on this property will be 25.5%.

Not too bad, huh? Based on these figures and the location of this property, this fourplex would likely make a good investment.

There are many ways to approach the financing of a real estate investment. The most common options are to pay with your savings, get a conventional mortgage, or tap into the equity of your primary home.

• Pay with your savings. Some investors choose to finance 100% of their investment property using their available savings. Doing so can drive up the cash flow from your investment and minimize any complications in the future. However, this is usually not an option for many investors. Also, consider this: Even if you have the cash to buy an investment property outright, you could leverage your money against a number of properties to diversify your risk and increase your returns.

• Conventional mortgage. Most investors prefer to finance an investment property using a mortgage loan. Creditors typically require a 20%-30% down payment to lend money on a rental. You'll also have to show enough savings to cover six months of vacancies.

  The main advantage of getting a mortgage is your ability to leverage your initial investment for better profits.From there it’s up to you if you want to use your down payment for one property,or a few properties of lower value.Regardless,you'll be hard-pressed to find a stock that allows you only to pay 20% of the price and still enjoy maximum returns.

• Equity Takeout. Many investors decide to take equity out of their existing home (using aHELOCto finance a real estate investment. Since the loan is leveraged against your primary residence, creditors likely won't need to know too much about the property you want to purchase.This can make the process of getting a loan much easier.However,you may be limited to the amount of money you can draw,based on how much equity you have built up.Most creditors will go up to 80%of the home value,minus what is currently owed.

The calculator is very simple to use and is designed to help you analyze returns from an investment property.You’ll need to include some financing details to get an accurate estimate of your earning potential.Let’s review this together.

• Step 1.On the first line of the calculator,indicate how much of a loan you need to purchase an investment property.You can use your keyboard or the arrow features to make this input easier.
• Step 2.Next,you can add the loan term(in years)followed by the interest rate you have been offered.
• Step 3.In the next section,you can start by adding the value of your initial investment.Typically,this is the value of your down payment,plus closing costs and essential repairs.
• Step 4.On line five,indicate the rate of return on your investment.If you are unsure,refer to the previous section where we review how to calculate yourtotal ROI.In short,you’ll need to divide your cash flow from the property,by your initial investment,times 100.It’s not unusual to have an ROI of 15%or higher,depending on the location of your investment property.
• Step 5.If you intend to re-invest your profits,you can add it to line six of the calculator.Landlords can either prepay their loan or use the earnings for additional renovations,if applicable.Ultimately,it depends on what your financial goals are.
• Step 6.Once completed you can view your results in the form of smart prompts and information summaries.

Having measurable goals is important, but the best investment goals are rational and attainable. You can aim to have vacation money saved up next year, but it might not be reasonable if your rate of saving is too low.

For example, if you can only afford to invest $200 per month to your goal, it becomes unattainable. Based on a probable rate of return you'll end up with about $2,600 for your vacation.In this case,the shortcoming might not be life-changing,but not meeting critical financial goals(like yourretirement nest egg)can be.

After setting goals,you'll have to gauge what it takes to reach them. By using the right resources, you can determine if your plan is reasonable and attainable. In some cases, you may have to decrease your expectations, take on more risk, increase your deposits, or change your timeline to make a goal more realistic.

Finally, you'll have to decide how much involvement you want in your wealth management.Some people like to work with a financial advisor,while others prefer to manage their own portfolios.

With an advisor,you'll be given options based on your goals, timeline, and risk tolerance. You won't have to spend as much time researching companies or industries.In exchange for the hands-on guidance,you'll becharged a percentageof your capital under advisory. If you have a busy lifestyle and less time to reach your goals, hiring a financial advisor could be beneficial.

The alternative of being your own advisor is possible too. You'll have to put in the time and effort into learning the market,but it can pay off substantially in the long run.When you become your own advisor,you can have a better understanding of what makes a good investment while keeping a higherpercentageof your earnings.When you have ample time to meet your goals and feel passionate about the process,being your own advisor could be favorable.

Whichever approach you choose,the way you invest your money will revolve around your investment goals.You'll likely have short-term goals along with mid- to long-term objectives as well. In the next section, we'll go over some common goals and the typical outlook for achieving them.

Don't forget to bookmark this page and save it to the home screen of your smartphone. You can return to measure the progress of your investment goals throughout life. If you found this page useful, please promote us on social media by using the share feature.

Investment goals are usually split up according to the timeframe an investor has to reach them. Goals can be short-term, mid-term, or long-term and it's important to have a dollar figure for each.When you invest for something that's happening 20 years into the future, you have plenty of time to ride out any volatility in the market. By contrast, an investor that is realizing a goal in 2 years would probably prefer to have more stable (or liquid) assets to preserve his or her gains. See the table below for a sample of how to arrange your investment goals.

Writing down your goals according to your timeline makes them more tangible.It's also easier to share your plans with an advisor or family member when you have them clearly listed out. By adding a dollar figure to each goal, you set a clear and concise expectation of your (or your advisor's)efforts.

The goals you come up with when you begin investing are likely to change as you go through different stages in life.Eventually,you'll cross off short-term goals and replace them with your mid-term goals. As a result, you'll probably want to revisit your goals regularly to account for any changes in your life situation.Typically,it's best to review your investment goals on a yearly basis.

For example, when you are just starting out in your career, you'll probably want to save up about three months of your income for an emergency fund.As you get older and expand your family,you'll want to double or triple that emergency fund - creating a new short-term goal. Then when nearing your long-term goals, you'll want tore-allocate your assetsto reflect the next transition in your life.

The calculator is very easy to use and is designed to help you analyze your investment goals.You'll need to include some information about your goals to see if you are on track to achieving them. Let's review the questionnaire together.

Step 1.On the first line of the calculator you can start by documenting your investment goal in dollars.You can use the arrow keys or your keyboard to make this easier.

Step 2.Next,you can add the amount of your initial investment.This is the money you have already put towards this goal.

Step 3.On line three,include the rate of return on your investment,followed by the number of years you have to save towards your goal.

Step 4.If you plan on making regular deposits to reach your goal,add it to line five of the calculator.Then determine the frequency of your deposits on the following line using the drop-down menu.Typically,it's easier to make small periodic deposits as opposed to one large investment from the start.

Step 5. If you are making regular contributions, you should specify if your deposit is made at the beginning of the period by selecting the checkbox. If the deposit is made at the end of the period, leave the box unchecked.

Step 6. The next part of the questionnaire you'll have to add details about your taxes and the rate of inflation.On line eight of the calculator specify the expected rate of long-term inflation.

Step 7.Then,add yourfederal income tax rate,along with your state tax rate.

Step 8.Proceed to your results.

Once the questionnaire is completed,you can view your dynamic results.

To the right of the inputs,you can see the value of your investment according to your time horizon.We provide you with the tax-deferred total,along with the worth after taxes,and how inflation could impact your earnings.

For more detailed information,you can view the integrated reports.The first tab provides you with the balance of your investment over time.You can hold your mouse over any point of the graph to get an exact reading of your balance.The next tab,investment result by year,summarizes the balance of your investments each year.

With this information,you should get an idea of whether your investment goals are reasonable and if you have the right plan in place to attain them.If your plan is not on track to reach your goal you have a few options:

1.Decrease your expectations

2.Increase your regular deposits

3.Take on higher-risk investments

4.Or,increase your time horizon.

Ultimately,the best course of action will be highly personal and dependant on yourinvestor profile.Happy investing!