What is a REIT and Why You Should NOT Waste Your Money Investing In Them
When I first started to invest in real estate I tried everything possible to do it. Flipping, wholesaling, renting, and even investing in REIT's. When I first heard of a REIT, I had no clue what it was. So, I had to ask the question, “What is a REIT” and should I invest in them?
Honestly, after learning what is a REIT and how how I can make so much more money by learning how to invest in real estate myself, I realized that I can make WAY more money doing it myself.
Even though I make so much more money investing in single family rental properties, that type of investing may not be for everyone.
Actually, investing in REIT's can be a good option for people with little time to spend building their own rental property business.
Let's look at what is a REIT and the good and bad about them.
What is a REIT compared to Traditional Real Estate Investing
What is a REIT (Real Estate Investment Trust)
REIT is a method of investing that is like investing in stock markets, except that the investment is in a company that invests in real estate on behalf of its shareholders.
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You are still investing in real estate, but this investment is made indirectly through a trust operated by managers who are skilled and experienced in real estate investing.
If you do not have the kind of money to buy expensive residential or commercial properties, you can invest in a real estate investment trust to earn a good return on your money.
What is Traditional Real Estate Investing
With traditional real estate investing, you start your own business and buy one rental property.
This one rental property will make you money in passive income each month when you place one tenant into the property.
Building a rental property business may sound hard but it is fairly simple. There are some things you need to know like:
- Know your expenses
- Know how much you can rent it for
- Find a property manager
- Find a good tenant
- Calculate the numbers to make $250 or more in passive income.
I made a free course for you to get started if you want to with investing in real estate. Get the free course below to help you get started.
Why I Invest In Real Estate Myself Instead of Investing In REIT's
The biggest reason is that I can make so much more money with the money I invest in single family homes rather than a REIT.
REIT Investing Example:
With a REIT, if you invest $10,000, your dividend (more on that later) may be $300-$500 in one year.
This is depending on the REIT you invest in, the market, other investors, etc.
Single Family Home Rental Example:
With a single family home, if you invest $10,000, your yearly profit could be $3,000 to $3,600.
This is because you buy a home that makes you $250 to $300 a month in passive income. After 12 months, you are able to make $3,000 to $3,600 a year!
PLUS, if you invest in real estate the right way, you will have others do all the work for you while you don't do any work at all.
Investing in yourself is better than REIT's
The 10x profits from a rental property over a REIT is a huge reason to invest in rental properties.
Another great reason is that you are investing in yourself and creating your own business.
Also, there are 6 ways you make money investing in real estate. I wrote all about those six ways here but here is a quick recap:
- Monthly Passive Income
- Equity Capture
- Forced Appreciation
- Mortgage Buydown
- Market Appreciation
- Tax Advantages
One last thing I want to show you is the 16 amazing reasons why you should invest in rental properties. If after this, you are not convinced to invest in rental properties, investing in a REIT may be the best thing for you to invest in. 🙂
What You Need to Know About Investing in REIT's
Hopefully I have shown you that you can do SO MUCH BETTER investing in rental properties than REIT's but let's continue looking at REIT's though.
Even though I love investing in rental properties, not everyone is right to invest in them.
REIT's are a good alternative and does have some good advantages.
Actually, if I were not investing in my own business and just wanted to invest easily in real estate, I would invest in a REIT. In fact, I used to invest in REIT's before I became an actual investor.
So, let's look further at investing in and what is a REIT.
What is a REIT by definition?
REIT is an acronym that stands for Real Estate Investment Trust. A REIT is a corporation that owns and operates many properties, including both residential and commercial properties. The operations of a REIT are managed by real estate experts.
Commercial properties in the portfolio of a REIT are hotels, offices, apartment buildings, warehouses, and so on.
The income of such a company is dependent upon income-producing properties. Its profit is divided among the members according to their investments in the company.
This is because the price of commercial properties is so expensive that hotels, office buildings, warehouses, shopping complexes, etc. are all usually out of reach for the average person who wants to invest in real estate.
However, investment in commercial properties becomes possible for you if you choose the option of REITs. You do not get the same returns this way as if you were investing directly in the property itself, but you also face far lower risk.
Many of these REITs are listed on the stock market and their shares are traded just like other publicly listed companies.
The biggest advantage of a REIT is that it makes it possible for a common individual to invest in real estate by buying the shares of the company.
Any individual can become the owner of a part of real estate and earn dividends out of income produced by this real estate.
What is a REIT dividend?
The biggest attraction of investment in REITs is dividends. By law, REITs need to distribute 90% of their earnings among their shareholders. These payouts are in the form of dividends.
Corporation tax is not applicable on REITs just because of this requirement of distribution of almost 90% of earnings. The earnings of REITs are mostly in the form of rental income and capital gains.
If you invest in a REIT, you are eligible to get dividends from the company in the proportion of shares that you hold in your name.
It is easy to buy shares of any REIT that is listed on the market. You can trade in the shares of a REIT just like any other company listed on the market.
The amount of money you receive in the form of dividends depends upon the income of the company and the number of shares you own in the company.
How will the REIT dividend grow your investment?
REITs can give higher and more frequent dividends to their shareholders as they are not subject to many of the Federal taxes that apply to other companies.
This is why more and more investors are drawn to real estate investment through REITs.
In addition to high yield, REITs also offer the advantage of capital appreciation to investors. This is possible through reinvestment of dividends received from REITs.
These plans are called DRIPS (dividend reinvestment plans). If you opt for DRIPS, your dividends are automatically reinvested in the shares of the REIT.
No sales fee is charged by the REIT and the investor enjoys the higher growth yield of these reinvestment plans.
Why should you invest in REIT for an investment?
There are many reasons why you need to invest in REITs.
- First, you get a chance to invest in real estate with a small amount of money. You can reap dividends with the expertise of the corporation already experienced in commercial real estate investment.
- You can diversify your portfolio by investing in REITs.
- You can experience security and reliability with REIT investment.
- REIT investment is high-yield in comparison to investment in the stock market.
- Buying and selling shares of REITs is as easy as buying shares of other companies listed on the market.
- REIT investments also allow for long term capital appreciation.
- REITs have a very low barrier to entry. You do not need large amount of money to start investing in REIT.
- There is no corporate tax on the REIT as it pays out 90% of its earnings in the form of dividends to its shareholders
- The common investor gets access to commercial real estate so expensive that it would be impossible for him to buy otherwise.
- Selling property to get money can be a time-consuming job, but if you invest in REIT you can quickly get your investment back whenever you wish by selling your shares
Investing in REIT is a good thing for an investor as it not only lends diversity to his portfolio but also increases the total yield from the portfolio. Also, REIT investments are comparatively safe and reliable.
Is a REIT a good investment?
Investors are constantly seeking investment vehicles with high yields, and REITs have emerged as extremely popular tools of investment.
These real estate investment trusts add a certain level of stability and reliability to the portfolio of any investor along with high yield.
The shares of a REIT are publicly traded just like the shares of any other company listed on the stock market.
REIT is not charged the corporate tax that other corporations must pay. This is one of the reasons why yields from a REIT are higher than the yields of other companies.
No matter how one looks at REIT investment, it turns out to be good one:
- High return on investment
- Less risk than traditional real estate investing
- Reliability of dividends
- Liquidity being that you can sell the shares at any time like all other stocks
- It also offers opportunities for long term capital appreciation in addition to high yields.
Can you lose money in a REIT?
Investing in a REIT is just like other types of investments. The investor is exposed to the risks of market conditions.
Also, the fact that the shares of a REIT are traded on the stock market means their prices can go up and down like stocks of other companies.
This means you can lose money in a REIT just like investment in the stocks of any other company.
This is why it is important to consult a financial advisor who has knowledge of these REITs before parking your money in a REIT.
The thing to note here is that the price per share of the REIT may go up or down, but the dividend remains unaffected.
For example, if you have purchased 100 shares of a REIT for $20 per share and the price goes down to $15 per share, you continue to get the same dividend per share even though the total amount you get goes down.
Why not to invest in REITs?
With so many advantages, it seems that REITs are one of the best investment vehicles around. However, like any other high-yield investment vehicle, REITs can be risky for the investor at times.
If you are investing for a short time period, REITs are not for you. REITs are best suited for long term investments.
Dividends from a REIT can be adversely impacted by fluctuations in interest rates.
Therefore, you should not become worried with the performance of your REIT investment over a short period of time.
While REITs have traditionally provided higher yields to investors, they are also risky in many aspects.
As they are linked to the prices of real estate, many investors prefer to move out of REITs whenever real estate prices go down or become stagnant.
Shares of REITs become weak whenever there is any weakness in the real estate prices.
If the REIT you have invested in is not traded on the stock market, liquidity becomes a big problem for you. You cannot sell out your shares readily on the open market if the prices of your shares have fallen.
The biggest drawback of REIT investment is that you have no direct control over your investment.
You are dependent upon the skills and experience of the managers operating the REIT. If these administrators are incompetent or charge very high fees, there is not much that you can do.
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