If you have little money but want to get into real estate and make money, consider today your lucky day. Real estate investing is not solely reserved to the wealthy. In this article, we're going to show you how to start investing in real estate without owning physical proprieties or becoming a landlord. It's all done through an investment vehicle called real estate investment trusts (REITs).
[Related: We exchanged our REIT ETF for 4 great REIT stocks. What took so long?]
Real estate investment trusts: an overview
A real estate investment trust or REIT (pronounced as "RIT") is a type of investment vehicle that allows anyone to invest in real estate without owning physical properties. What? Think of REITs as companies that pool money from a group of investors to buy, invest in or finance real estate properties. Sounds like mutual funds, right? Yeah, sorta! With REITs, you do nothing but sit back and collect rent real estate money! Congress established REITs in 1960 to make it easy for the average Joe and Jane to invest in real estate. Let's not screw this up; this is too important. Instead, we're going to let the amazing video below do the justice that the topic of REITs requires and deserves! It is produced by the National Association of Real Estate Investment Trusts. Have a it.
Here are the key features of real estate investment trusts.
Video recap: the key features of REITs
If you didn't watch the video above, and we highly suggest you do, here are the key points outlined in the video that you should take home.
- REITs allow anyone to benefit and make money from real estate.
- REITs are companies that pool money from a group of investors to buy, invest in or finance real estate properties.
- There are many types of REITs, including equity and mortgage REITs and their sub types (retail, residential, office, healthcare).
- REITs are modeled after mutual funds.
- A REIT must pay out at least 90% of its taxable income to shareholders in the form of cash dividends! At the end of the year, if a REIT has a lot of leftover cash in its coffin, it must distribute it to investors!
- REITs must be accessible to anyone; that's why they were created by Congress in 1960.
- A REIT must have at least 100 shareholders to be classified as such.
- A REIT must invest at least 75% of investors' money in real estate.
- With most of the money a REIT generates, at least 75% must come from real estate properties.
- REITs allow anyone to invest in all kinds of real estate properties (healthcare buildings, shopping malls, residential or commercial buildings, etc.)
- REITs may function as exchange traded funds or mutual funds.
Why you should invest in REITs
Not sure about real estate investment trusts? Here are some of the many reasons why your investment portfolio should include them.
- They help provide a guaranteed and steady stream of income. By design, real estate investment trusts must return their taxable income to investors in the form of cash dividends. This is a great option, especially if you are a retiree!
- They provide you with easy access to real estate without the stress of being a landlord. You don't have to deal with crazy and unruly tenants or building maintenance!
- They can help you diversify your investment or retirement portfolio; they are a complete type of investment beast!
- They embody the engines that power stock market wealth. Not only are REITs dividend cash cows, they also offer the potential for extreme capital gains. You're getting the best of both worlds!
- They can help you become a real estate millionaire. Do you think most real estate moguls or millionaires own lots of physical properties? They just know this simple trick that us regular folks don't know about. You just buy the REIT or a few of them and call yourself a real estate investor!
Which real estate investment type should you buy: REIT ETFs or real estate mutual funds?
REIT ETFs vs real estate mutual funds
Before you purchase real estate investment trusts for your investment portfolio, you must decide between REITs as an exchange traded fund (ETF) or a mutual fund. REITs ETFs track an index (e.g. the MSCI US Investable Market 2500 Index, Dow Jones U.S. Select Real Estate Securities Index) and are very cheap. As ETFs, they are traded on the market in real time and their prices fluctuate constantly throughout the day. On the other hand, real estate mutual funds function like pure mutual funds. Their prices do not fluctuate throughout the day, and are purchased at the net asset value (NAV) at the end of a trading day. Like REIT ETFs, real estate mutual funds can also be very cheap. It's easy to purchase REITs for your investment portfolio.
How to buy REITs
As previously stated, anyone can invest in real estate investment trusts. REITs are very suited for brokerage and retirement accounts (traditional or Roth IRAs). Many employers may not make them available for 401ks. Real estate investment trusts can be purchased from an investment broker, such as Fidelity, E-trade, Schwab, Vanguard, Ally, among others.
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The bottom line
Real estate investment trusts allow anyone to invest in real estate without physically owning properties. For the individual who desires to make money in real estate without physically owning properties, real estate investment trusts are a key investment vehicle to add to a portfolio. By the very nature of their design, they can provide investors with a steady income stream through dividends and capital appreciation. To learn more about real estate investment trusts, here are some useful resources:
- National Association of Real Estate Investment Trusts
- Investor.gov
- Investopedia
- Motley Fool: What is a REIT?
[Recommended: Not comfortable investing on your own? Hire a certified financial advisor!]