Forget Buying a Home and Invest in an REIT
The benefits of investing in real estate are often a key factor driving first-time homeowners—but high down payments can be a steep hill to climb. The same holds true for those seeking to purchase a rental property as a consistent income stream. Fortunately, there’s another way to start investing in real estate with much less money.
A REIT, or real estate investment trust, is a special type of investment that has aspects of both a regular stock and a real estate investment. This unique investment class offers opportunities to earn great returns from the real estate market with only a small commitment on your part.
Start With a Low Commitment
Unlike an investment property, you can start investing in REITs with a very low financial commitment. REITs can be publically traded just like a regular stock so that you can buy into a REIT with your brokerage account at any major brokerage.
One well known REIT is Public Storage, which trades on the New York Stock Exchange under the ticker symbol PSA. Shares of PSA currently go for around $200 per share. You could buy just one share for the current market rate plus any required brokerage commission. Compare that to directly investing in real estate which typically requires tens of thousands of dollars to get started, if not hundreds of thousands.
Of course, you could put just as much into REITs as you do in physical properties, but there are more benefits that REITs offer outside of the low-cost entry point.
Don’t Worry About Emergency Repairs or Collecting Rent
If you invest directly in a rental property, it is up to you to collect rent, deal with problem tenants, and solve other issues that arise. Sure, you can hire an outsourced property manager for your properties, but that typically takes 10 percent of your revenue off the top. With a REIT, you don’t have to worry about ever dealing with a tenant.
Landlords are required by state and local laws to perform a certain level of maintenance. More importantly, some maintenance needs to happen right away to prevent further damage. Virtually every small-time landlord has a horror story about being woken in the middle of the night for emergency repairs. As a REIT investor, you don’t have to deal with any repairs.
Like the idea of making money from rental properties without dealing with the headaches? One option is Camden Property Trust (CPT), a Texas-based REIT that operates apartment communities around the United States. If you drive around any major city or suburb, odds are you will come across one of Camden’s 180 apartment communities with a total of over 26,000 apartments. When you buy stock in Camden, you are buying into the Camden REIT. In the case of Camden, that is a company with nearly 2,000 employees.
Meanwhile, Innovation Homes (INVH) is an REIT focused on single-family rental homes. Innovation homes own over 48,000 homes across nine states.
One of the biggest ways real estate investors fail is by underestimating property maintenance, construction, or repair costs. For example, if you were to own five properties and one had a major repair, it could ruin your investment return for the entire portfolio. A $5,000 repair is not a big deal in a large housing portfolio, but if you only own a property or two, that can wipe out your profits.
Just as you wouldn’t put all of your eggs in one basket in the stock market, you should not do so with real estate. But because of the high price point of buying a property, getting diversification is not cheap or easy. However, in a REIT that owns hundreds or thousands of properties, an expense here and there is no big deal and won’t wipe out profits generated by other units.
Get a Cut of Real Estate Profits Through Dividends
From what you read so far, a REIT looks just like a regular stock on the stock market. In most ways, that is 100 percent accurate. However, there are some specific rules around REITs that make them more attractive than typical stocks.
The biggest benefit is a rule that requires REITs to distribute at least 90 percent of taxable income to shareholders as dividends. While some stocks pay no dividend at all, a profitable REIT always pays a dividend. For example, Medical Property Trust (MPW) pays a 7.5 percent dividend yield, W.P. Carey pays a 5.9 percent dividend, and American Tower pays 1.9 percent. Dividend yields are calculated based on the current stock price and the most recent dividend.
As Easy as Buying a Stock
You know what makes an REIT unique, but how you buy in is simple. Unlike buying a property that often requires input from real estate agents, lawyers, and accountants, buying an REIT is as simple as buying a stock. If you have cash sitting in your account, you can invest on your phone in a matter of minutes!
REIT investing comes with the same risks as the stock market, but far fewer risks than direct property investing. With opportunities to earn a big return with none of the work of direct investing, buying a REIT is the best way to make your first real estate investment.