The housing market is red-hot right now!
So what were you thinking?
Three bedroom?
Four bedroom?
I think that might be a little bit above my budget.
Okay, so what were you thinking?
I'd love to keep it under a hundred.
$100,000?
Okay, I'll see what I can do.
Oh no, I meant a hundred dollars…
Wait, you’re hoping to invest in real estate with only a hundred dollars?
That’s ridiculous!
Or is it???
Are you itching to get into the real estate game, but lack the tens of thousands needed
for a basic down payment?
Or maybe you hate the idea of dragging yourself to open houses comparing different backsplash
treatments.
Well, there’s a way to own real-estate without investing in individual properties: buying
shares of a Real Estate Investment Trust, or REIT for short.
Let us give you a tour!
A REIT is a company that owns and most of the time operates income-producing real estate.
They are a fairly new fixture in the investment world.
The very first REITs were created in the U.S. in 1960 by Congress.
They were designed as a way for everyday people to own a piece of a large real estate investment
portfolio.
Since then, they’ve exploded in popularity with publicly available REITs in 35 countries
valued at over a trillion dollars!
And it’s easy to see why.
REITs are historically one of the best performing asset classes.
Between 1990 and 2010, the primary equity REIT Index grew at 9.9% per year, second only
to mid-cap stocks.
Also, here in America, REITs don’t have to pay corporate income tax as long as 75%
or more of the fund’s assets are invested in real estate.
Which means that the business overall has a lot more wiggle room cash-flow wise.
But the biggest draw for investors is the income-generation.
By law, REITs must pay at least 90% of taxable income to investors in the form of dividends.
And they’re nothing to sniff at.
The average equity REIT--one that buys properties--pays a 5% annual dividend.
The average mortgage REIT--which owns mortgage backed securities--pays a 10% dividend!
Compare that to the average S&P 500 stock, which pays 1.9%, and you can start to understand
the curb appeal!
While REITs are required to pay 90% of taxable income out in dividends, most REITs actually
pay more than 100% of income out to shareholders.
But that’s not as exciting as you might think.
A hefty 10% pay out isn’t as attractive if your share value falls by 15%.
That’s why it’s important to look at the “total return”.
You can calculate your “total return” by combining the dividend returns along with
the share price movement.
When you think about it, these two levers are very much like owning a physical investment
property.
On one hand, you are bringing in income from the rent you charge your tenants.
Then there’s also the market value of the home itself that should (hopefully) be going
up in value over time.
So even if you’re not making a ton of profit through rent after paying a mortgage and taxes
and upkeep, you could be experiencing a return through the appreciation of the property.
Or it could work vice versa.
And like property, REITs come in a lot of different styles.
For example...Retail REITs invest in shopping malls and retail outlets.
Residential REITs contain apartment complexes and manufactured housing, and Office REITs
have...you guessed it...office building complexes.
They can also focus on specific locations -- maybe you’re interested in Manhattan
real estate, or India’s first REIT that just debuted in March of 2019?
There are plenty of databases out there that can help you narrow your search by focus,
region, historical returns, and more.
The final consideration is whether to go public or private.
Shares in private REITs are offered exclusively through financial advisors and brokers, and
they can offer enticingly high dividends or niche specialties like resorts, senior living
centers or timber farms.
But make sure you put on a hard hat when checking them out.
Private REITs can pay extremely high commissions to the brokers that sell them…sometimes
up to 12% of your investment!
They aren't required to disclose conflicts of interest, and it's difficult to find performance
data on private REITs as a whole.
And they aren’t very liquid, so getting your money back quickly can be difficult.
And they’re usually for accredited investors only… meaning you have to have a million
dollars to invest or have made over $200,000 for the last two years.
If that doesn’t sound like you, buying a publicly traded REIT is as easy as buying
a share of stock.
You can log into an online brokerage account, and just look up the ticker.
And if you can’t decide on which REIT to pick, there are even ETFs that own stock in
different REIT companies -- kind of a sampler platter of real estate holdings.
You’re saying I can buy hundreds of different pieces of real estate online, without comparing
square footage, worrying about old fixtures, or getting calls from angry tenants in the
middle of the night?
Yep.
But there’s something special about owning your own property, taking care of it, living
in it.
Sure, but if you live in a city where property values are inflated, or you don’t plan to
stay in one place for very long, REITs could be a way to dip your toe in the real estate
market for as little as a $100.
And that’s our two cents!
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