Investing in real estate can be very lucrative. It’s generally considered as a safe investment, it protects the owner against inflation, and provides an extra income stream in the form of rental money.
Usually investing in real estate demands big capital. However, there are a few ways you can invest in real estate for less than your paycheck provides.
” Buy land, they aren’t making anymore of it. “
Why investing in real estate?
Real estate is considered a solid long-term investment. It is well known to hold value and to be good protection against inflation. On top of that, investing in a rental property will provide you with a solid and steady income stream.
While real estate investments usually don’t experience growth as stock investments do, they are considered safer and less volatile.
What budget is needed to invest in real estate?
There is real estate available for every budget. If you have enough capital, you can, of course, buy a rental property.
If you don’t (yet) have a lot of money to deploy, or if you don’t want to get into the hassle of managing a rental property, there are other ways to invest in real estate.
Let us look at what kind of investments are suited for every budget.
When you buy stocks, you are basically buying a small portion of a company. You also have that option with real estate investments. If you, for example, buy 1/1000th of an apartment building, you’re entitled to 1/1000th of the rental income, after expenses are paid of course. When you sell 1/1000th of that apartment building, you receive 1/1000th of it’s worth, plus or minus the accumulated appreciation or depreciation.
In other words, with investments in real estate, there are two ways you can make money. You receive rental income and can later (maybe) sell the property for a premium to the price you paid to acquire the property.
So how are we going to buy a small portion of a property? Well, that’s where a R.E.I.T. comes into play. R.E.I.T. is short for Real Estate Investment Trust.
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What is a Real Estate Investment Trust (R.E.I.T.)?
A R.E.I.T. is a company that generates income through real estate. The company either owns and manages properties, or finances properties and receives income through interest payments on mortgages. Investing in a R.E.I.T. can usually be done by buying shares of the company.
In general, there are three types of R.E.I.T.’s:
Equity investment R.E.I.T.:
Buys properties to rent them out. Properties that have increased in value a lot are often sold. The income generated by those sales is used to buy additional property. A R.E.I.T. can own many types of real estate. Some examples include Rental houses, apartment complexes, health care facilities, hotels, etc…
As an investor, you can buy shares of this R.E.I.T. and are therefore entitled to a portion of the rental income in the form of dividends. In the U.S. R.E.I.T.’s are obligated to pay out at least 90% of their taxable income in dividends. Also when the underlying properties go up in value or the market price goes up, you might be able to sell your shares at a premium to the cost you paid to acquire them.
Mortgage investment R.E.I.T
A mortgage R.E.I.T.’s finances properties. They lend money to real estate buyers and receive an income by interest payments on the mortgage they’ve provided to the buyers.
Because this type of R.E.I.T.’s income is determined by the difference between their cost to finance the mortgage and the interest payments they receive on the mortgage, they tend to be very sensitive to interest rate increases.
A Hybrid R.E.I.T. buys properties and finances properties.
Advantages & Disadvantages:
- Liquidity: When you invest in a R.E.I.T. you remain very liquid. You can easily buy or sell shares of the R.E.I.T.
- Accumulating: You don’t have to make your investment all at once. You can, for example, invest a part of your income each month.
- Risk: By investing in a R.E.I.T., you’re essentially buying a small portion of many properties, often in different cities and sometimes even in different countries or states. This advantage decreases the risk of losing money when something happens to a property or if the real estate value shrinks in a certain area.
- Managing: Your properties are managed by professionals. These managers make sure the properties are well maintained, adjust the rents, and are able to find the best places to buy additional properties. Owning real estate through a R.E.I.T. can, therefore, be considered as a passive investment.
- Taxes: In 2017 a new tax benefit was introduced to R.E.I.T. investors. This new Pass-Through deduction allows investors to deduct 20% of their dividend income. This means you are only taxed on 80% of your dividend income. You can find out more about the tax benefits of R.E.I.T.’s here.
- Low growth: Real estate doesn’t produce anything and therefore isn’t going to grow as much as manufacturing companies do. The appreciation in real estate prices is usually due to inflation or to an increase in the popularity of a certain area.
- Market fluctuations: R.E.I.T.’s are still subject to real-estate market fluctuations.
- Management costs and fees: A R.E.I.T. is still a company and therefore is managed. The costs involved with management and other fees cut away a chunk of the profit.
How to buy shares of a R.E.I.T.
R.E.I.T’s can be bought just like stocks on the common exchanges. If you have a brokerage account you can just buy shares of the R.E.I.T. of your choice through your broker.
The type of R.E.I.T. you decide to invest in is a choice only you can make. If you want to learn more about R.E.I.T.’s, there are some books to help:
- Investing in REITs: Real Estate Investment Trusts ~ Ralph L. Block: A solid choice for both novice and professional REIT investors. This book covers the most important parts of REIT investing and remains easily digestible.
- The Complete Guide to investing in REITs ~ Mark Gordon: This book is better suited for people who are looking to get their first introduction into Real Estate Investment Trusts. This book provides a basic understanding of REITs in basic and understandable terms.
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*DISCLAIMER: The content on this website is made in good faith and I believe it’s accurate. However, this content should be considered informational and not for making financial decisions.