As you may know, the primary way to invest in real estate is by purchasing a property. This may be a personal home, rental house, vacant land, commercial building, etc. This provides an opportunity to grow wealth through the property’s equity, which will grow over time as the property gains value and you pay down the mortgage (if you have one). You may also make money off rent, depending on your financial circumstances and the condition of the property. However, purchasing property, especially an investment property, requires a large chunk of money that the average person may not have. Nevertheless, there is a simple way to invest in real estate with little money.
This option is called a Real Estate Investment Trust (REIT). And it may sound fancy, but it’s actually quite accessible.
What is a REIT?
A REIT is similar to a mutual fund in which a group of investors pool their money to purchase properties or loans selected and operated by professional managers. Each REIT is a publicly traded company and can be purchased on the stock market or as part of a mutual fund or exchange-traded fund. Like traditional stocks, investors earn shares. The shares come from the income these properties or assets produce.
Three Types of REITS
Investors can purchase two types of REITs:
- Mortgage: These REITs purchase or originate mortgages and mortgage-backed securities (MBS). They make money off the interest on these loans.
- Equity: These REITs purchase and operate physical properties and make money off the equity. Each REIT usually specializes in one sector – residential, retail, health care, production, etc. They are the most popular REITs among investors.
- Hybrid: Composed of a combination of the previous two types of REITs, hybrid REITS add a little bit more diversification. Make sure you read the REIT’s prospectus to know what their primary focus is.
Nerd Wallet has a good explanation of the different types of REITS.
REITs are required to pay a minimum of 90% of their taxable income to shareholders in the form of dividends. These may be paid quarterly or monthly. How much investors receive depends on the performance of the REIT.
It’s important to understand that dividends from REITs are taxed differently than dividends from common stocks. Basically, dividends from common stocks are taxed depending on how long you’ve held your share and how you file your taxes (single, married/jointly, etc.). Kiplinger has a good breakdown on the specifics. Dividends from REITs, on the other hand, are always taxed as regular income, so the rate is according to the bracket you normally fall in.
How to Choose a REIT
Like stocks, you want to do your research before choosing a REIT to invest in. Take a look at:
- The company’s mission and history. Are they well-established? Do their ideals align with your own? Does the board of directors and administration have a high turnover rate? The consistency of the company’s operations can give insight to its future stability.
- Their current acquisitions and inventory. Are they adding new properties steadily? Is their inventory diversified? Just as you shouldn’t put “all your eggs in one basket” when investing, you don’t want a REIT to be highly focused in one area market, because they won’t have other properties to fall back on if that market takes a dip. Preferably, they should have properties in different states.
- Past earnings. Of course, you want a REIT with a good history of paying out dividends to its investors. However, you also want to pay attention to the consistency of those dividends. Did the higher payments come in spurts or were they in a relatively steady incline? You want the latter. Many investors will say to buy stocks in market dips, but a steep dip for a REIT could be a red flag.
How to Invest in REITs
Hopefully, I haven’t overwhelmed you with information, because there are a number of online platforms that can make it easy for you to read up on different REITs and invest in them. You can, of course, go with a more traditional investment route and hire a financial advisor, who can coach you through your best options. If you are willing to put in the work, there are cheaper options.
E*Trade, TD Ameritrade, SoFi, Robinhood, and Acorns are some of the online trading websites/apps that provide a DIY option. They all have different minimum investment requirements and signup perks. Choose the one you feel most comfortable using.
I prefer to use the micro-investing app Stash. I’ve been using it for years and enjoy the learning opportunities it provides. There isn’t a minimum investment requirement (I could invest cents if I wanted to), but there is a small fee (the beginning tier is $1/month). They’re insured if something ever happens to the company, so no fear in losing your investments. Plus, they have fun stock parties every week that let you get partial shares of specific stocks. If you sign up here, you get a $20 bonus and so do I.
Of course, if you’re read to take the leap into purchasing an investment property, give us a call at (910) 202-2546. We’re happy to get you started in the process and set you up with a portal for viewing properties that fit your needs.