What The Heck is a REIT?
Hello Money Talkers! This post is the fourth and final installment of my top four ways to invest in real estate: REITs. Now, you're probably wondering what the heck a REIT is. So I will break it down for you.
REIT is an acronym for real estate investment trust. These are companies that own, operate, or finance income-producing real estate. Congress established REITs in 1960 as an amendment to the Cigar Excise Tax Extension. The provision allows investors to buy shares in commercial real estate portfolios; something that was previously available only to wealthy individuals and through large financial intermediaries. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors.
Basically, a REIT is a way that an everyday investor can jump into real estate investing with little to no knowledge and a lot less risk and capital than doing it on their own.
So how exactly do you invest in REIT’s? Well, REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries – through the purchase of individual company stock, mutual fund, or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced, without actually having to go out and buy, manage, or finance property themselves. To purchase REITs all you have to do is open up a brokerage account at any well known financial institution like Vanguard, Charles Schwab, Fidelity, etc. and purchase shares of a REIT. A broker, investment advisor, or financial planner can help analyze your specific financial objectives and recommend appropriate REIT investments for you if you need a little help.
Now that you know how to invest in REITs, how exactly do they make you money? Most REITs operate along a straightforward and easily understandable business model: By pooling the capital of numerous investors to lease space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. Properties in a REIT portfolio may include apartment complexes, data centers, healthcare facilities, hotels, office buildings, retail centers, self-storage, warehouses, etc. You name it.
REITs are well oiled real estate machines that already have everything figured out, and all they need is your funding to operate and they cut you a check for a piece of the profits they generate with your investment in their company (technically, once you buy shares it's partly your company too).
This gives you the financial perks of landlording or being a hard money lender without all of the headaches involved. Pretty cool huh?
So what sets REITs apart from other investment vehicles? If they work like stocks, why not just buy stocks in Amazon, Bitcoin, or Google? Well, REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns. Not to mention that since most REITs are publicly traded like stocks, this makes them highly liquid (unlike physical real estate investments).
So if you have been wanting to invest in real estate, REITs may be a good way for you to do so. You don’t need to have extensive real estate knowledge to get into REITs. You do not need to have a large amount of capital, so you can start small. Plus, REITs allow you to enjoy the financial gains of real estate investing with very low risk and no leverage. This real estate investment vehicle may be able to bring you one step closer to financial freedom! I hope this was helpful. Until next time Money Talkers.