Have you ever thought about buying a property and renting it out to make money? A lot of us have, but for one reason or another, we dismiss the idea. Reasons may include: I don’t have enough money to make a down payment, I don’t wanna deal with annoying tenants, I don’t wanna deal with maintenance and fixing things when (yes not if but when because they will) break down), or I’m not comfortable with another mortgage in my name, or what if I don’t find a tenant fast enough. Is that enough reasons? There are more too.
My Introduction to REITs
So let me introduce here the alternative of a rental investment property which is a Real Estate Investment Trust (REIT). This is a financial product you can buy just like a stock. But instead of investing in a company that provides products and services, you’re investing in a company that buys and sells real estate.
The real estate could be commercial like malls, shopping centers, stores, office buildings, which are called equity REITs or residential mortgages or mortgage back securities called mortgage REITs.
REIT’s are a lot like investing in a mutual fund that has properties in it instead of stocks. There are advantages and disadvantages to investing in a REIT. The advantages are the opposite of the reasons I mentioned in the first paragraph.
The disadvantages are that you are not in control of the properties you are invested in with a REIT, some say the return with REITs is not as high as with owning and renting actual real estate yourself. I think this kind of makes sense because you are working harder if you own and rent property yourself. Also, the value of the REIT is more volatile than real property.
How to Invest in a REIT
Ok, so how do I make money if I invest in a REIT? Let’s take AG Mortgage Investment Trust Inc symbol MTT as an example. Its price per unit (yeah they’re called units instead of shares just to make life more confusing for us :-/) is about $17.66 at the time I wrote this: (Example REIT Price). So if you invest $10,000, you can get almost 566 units. It currently pays a dividend of .48 per quarter, so each quarter you can earn about $266 (.47 X 566). So per year you will earn about $1,064 which is about a 10.5% return ($1,064/$10,000)!
This profit is before taxes you would have to pay the dividends earned. Most REIT dividends are taxed as ordinary income so the rate depends on what bracket you’re in – 25%, 28%, 33% if you’re a high-roller and so on. One reason it’s so high is that per IRS regulations, REITs have to pay out 90% of their income to their shareholders. Please note that I am not advising to buy this REIT, but just using it as an example.
Is a REIT Right For You?
REITs are risky because they are based on lots of properties and you don’t have control over managing the property. But there are also fewer headaches because you don’t have to be a landlord, deal with problem tenants, and fix potentially broken things at your rental property.
If you decide to do more research you will see that many people invest in REIT’s to diversify their portfolio with real estate, seek higher returns (because many REIT’s have higher returns than stocks or mutual funds but they are riskier too – see risks here: REIT Risks), and REITs are easier to buy and sell than real property as many of them are on the stock market, e.g. NYSE. I guess if you wanna keep things simple, buying a solid REIT would be better than buying and renting a property.
Just make sure you ask yourself the questions of why you’re picking a particular one just because there are so many out there to choose from that have various types of underlying properties.
So how do you feel about real estate investing?