Buying single-family houses with hopes of seeing massive
price gains has historically created poor returns. Buying property requires
tons of excess capital, and flipping housing takes time and expertise the average
American doesn't have. More than 50 years ago the U.S. Government signed into
law a way every American could passively reap the rewards of investing in real
estate. They're called real estate investment trusts, or REITs.
REITs are private or publicly traded companies that collect
money from investors to buy and lease real estate. That means investing in a
REIT can be as easy opening a brokerage account. Even better, instead of paying
taxes, REITs payout 90% of their income in dividends to investors, creating
yields upwards of 5% in many cases.
Here are seven reasons why REITs is the best way to invest
in real estate.
7. Better and more
When you think of your home as an investment, you should
expect a return -- and historically those returns have been mediocre. On
average, home prices are up 70% over the last 14 years. That makes for an
average annual return of about 4%. Add in the cost of inflation and that return
is cut to roughly 1.5% annually.
Over the same time, an investment in a REIT like Realty
Income or Simon Property Group would have generated an average annual
return of 18% and 21%, respectively.
6. Consistent and
immediate cash flow
One of the pitfalls of directly investing in real estate is
lack of cash flow. You throw in tons of your time and capital, and then hope
for a big score when it's all over. If you plan to rent and have trouble
finding or replacing tenants, it could significantly impact you returns.
Not only do REITs take care of all the heavy lifting, but
they'll pay you a dividend every quarter for the privilege. That means you'll
get a check every few months from the first day you invest until the day you
5. Less industry
Reading the company's filings, learning what types of
properties the company buys, how they do it, who runs the business, and what's
their track record, are all important questions to answer before considering
There is a significant difference, however, between
understanding a business, and attempting to run a business, like renting
property. It's just as dramatic considering the expertise necessary to be
successful flipping houses.
4. Less capital
Beyond getting a mortgage and buying a home, the idea of
further investing in real estate for most people is squashed by lack of funds.
Most REIT stocks cost less than $100 per share.
3. No debt
There's always risk in investing, but that risk gets
multiplied when debt is involved. For instance, many of those who bought homes
in 2006 or 2007 still owe more on their mortgage than their homes are
Since you can invest in a REIT at a much lower price, it
doesn't require taking on any debt.
The biggest problem with owning, renting, or flipping is
lack of diversification. Owning even a few properties leaves you incredibly
vulnerable to price changes in a region, impacts of potential local rezoning,
and plenty of other unforeseen risks.
Many of today's larger REITs own hundreds of properties all
across the country and even overseas. This protects the business and investors
from taking significant losses due to problems with just one property.
For even more diversification, you can invest in a basket of
REITs spanning all of the real estate industry by simply investing in a
low-cost exchange-traded fund like Vanguard's REIT ETF.
1. You can get out at
The worst thing that can happen when investing in real
estate is you throw tons of time and money into a property and you have to take
a huge loss -- or worse, you can't sell it at all.
Since many REITs are traded on public stock exchanges, this
is rarely a concern. If you want out, you can get out, anytime -- and broker
costs are a lot cheaper.
here to access the full article on The Motley Fool.