Everyone should know by now that Real Estate is one of the best investment vehicles out there. Billionaire Andrew Carnegie said that 90% of millionaires got their wealth from Real Estate. To help you on your Real Estate journey, I have already provided some solid strategies on this blog. I invite you to take a look at my articles explaining the “Buy and Hold – Rental Property Strategy” and “The BRRRR Strategy for Real Estate Investing”. However, both of these strategies require a reasonable amount of capital. They also require good credit. You have to meet firm pre-requisites to use those “traditional” Real Estate strategies. But, there is a “new school” method you can use to reap the benefits of Real Estate without a lot of capital for a down payment or good credit to secure a loan. This method focuses on investing in REITs (Real Estate Investment Trusts).
REITs date back several decades, but “traditional” ways of investing in Real Estate go back several millenniums. So, in my opinion, REITs are a very “modern” approach. Additionally, REITs seem to be a little bit of a “secret”. Not everyone knows or talks about them. To my surprise, even seasoned Real Estate investors are sometimes unaware of this great vehicle.
With this “new school approach,” you can take action and invest in Real Estate today! You don’t have to check all the boxes needed in the typical Real Estate investment avenues. Buying a rental property, or flipping a house, might be out of your reach at the present moment. But, investing in REITs surely isn’t. You can thank the power of technology and innovation for this opportunity!
What is a REIT?
Well, without further ado, I would like to introduce you to the power of “Real Estate Investment Trusts”. These trusts are generally abbreviated as “REITs” in the investment community. Don’t let the fancy name frighten you. Essentially, they are companies that invest, and in certain cases operate Real Estate properties.
The Real Estate properties that the REITs own can be commercial Real Estate. For example, office space, warehouses, hospitals, shopping centers, hotels. The properties could also be Residential Real Estate. For example entire rental apartment buildings, multifamily homes with several units. Generally, REITs are focused on specific types of properties and locations. For example, they will only own hospitals and medical centers in Southern California. In certain occasions, REITs are much more “diversified” and invest in a wide range of properties, as well as a vast range of locations.
The REITs’ business model is quite simple:
- Investors pour money into REITs.
- The REITs’ management buys and operates Real Estate assets using the available funds.
- Those assets generate income for investors.
Basically, a REIT is a company where thousands of investors “pitch in” to buy properties. Then collectively reap the benefits from the ownership and operation of those properties.
In certain cases, REITs focus on making money from financing Real Estate endeavors. Not necessarily owning Real Estate, like the “Equity-based REITS” described above. Those finance-based REITs are named “Mortgage REITs”.
Perhaps you’ve already heard of two very famous Mortgage REITs that are sponsored by the U.S. Government. They are Freddie Mac and Fannie Mae; their business model focuses on buying mortgages.
There are hundreds of different REITs out there, and not all of them are involved in Real Estate the same way. Please consider this when evaluating potential investments. In 2020, some of the fastest-growing fields for REITs are Data Centers and Telecommunication infrastructure.
Does Investing in REITs yield good returns?
The track record for REITs is extremely impressive. Between 1972 and 2013 REITs returns compounded at 10.4% annually. This was almost identical to the SP 500’s yearly return of 10.5%. Please keep in mind the global Financial Crisis occurred during that timeframe. REITs were one of the best performing investment vehicles during that entire period. Regardless of the negative impact, the crisis had on all asset classes. Recently, REITs have continued to perform very well, check out the returns of the largest four REITs below!
I also want to point out these four REITs are massive, they have a combined market cap of over $300 Billion. Which at the time of this writing is greater than the market cap of many massive and famous companies with worldwide reach. For example none of the following companies individually surpasses the $300 billion mark (some are very far from it): Disney, Netflix, AT&T, Pepsi Co, Ford, Pfsizer, 3M, Caterpillar, American Express, Goldman Sachs, McDonald’s, or even Tesla!
Performance of the largest REITs by market cap in 2019:
- American Tower with ticker symbol AMT (returned 45%).
- Prologis with ticker symbol PLD (returned 55%)
- Crown Castle International with ticker symbol CCI (returned 33%).
- Equinix with ticker symbol EQIX (returned 66%).
Additionally, investing in REITs provides 6 strong advantages over “traditional” Real Estate investing:
1.) Low barrier of Entry of both Funds & Expertise
To invest in Real Estate through REITs, you don’t need a vast amount of capital. You can buy publicly-traded REITs stocks for a couple hundred dollars. Or you could invest in non-publicly traded REITs for as low as $1,000. Check out the REITs I mention at the end of this article. This is considerably lower than the required down payment to buy an average priced house.
According to Zillow, the median home price in the United States was approximately $230,000 in 2019. So, a 20% down payment (to avoid paying for Private Mortgage Insurance) will set you back $46,000.
Additionally, you don’t need to have the expertise or skill needed to make a sound investment. For example, the expertise to evaluate a specific rental property’s potential return-on-investment (potential appreciation & cash flow). You don’t need to obtain the skills necessary to manage and maintain the rental property (so you can collect rent every month).
Please note: you still need skill and good judgement to pick a “great REIT” that will provide a healthy ROI. (That is why you need to evaluate the REIT’s track record, etc.) But once you’re invested, the REIT’s management will decide how to invest the funds accordingly. You don’t have to select or manage the Real Estate yourself, the professionals will do it for you (and hopefully they will do their job correctly.)
2.) Extremely passive
You do NOT have to spend time on any of the “chores” that revolve around typical Real Estate investments. For example, you don’t need to find a reliable realtor and find a good investment property to buy. Subsequently, you don’t have to find reliable tenants, manage the property, and take care of repairs/maintenance.
With REITs, you simply invest your money and the REITs professionals will take care of all those matters for you. They will pay you dividends, from the rent they are collecting. They basically make you money while you sleep.
3.) Massive Diversification
Usually, your money is spread out throughout a massive portfolio of Real Estate properties (not just 1, or 5, or 10). As an example, let’s assume you have $30,000 invested in one single-family home. Let’s say that you lose your tenant for that home. That vacancy will generate a big problem from a monthly cash flow perspective. A vacant home will leave you paying the monthly mortgage (and expenses) out of your own pocket.
However, let’s say you have $30,000 invested in a REIT. Since the REIT is invested in a plethora of properties the risk is spread out and diversified throughout all those investments. If one of the REIT’s properties becomes vacant, the impact on you directly is mitigated. This diversification represents a massive advantage from a risk perspective.
4.) Exclusive Types of Investments
Additionally, you can invest in property types that are typically NOT available to the average Real Estate investor. You can invest in Commercial Real Estate properties like hotels, hospitals, malls, warehouses, or data centers. Or you can invest in Multi-Family and “own” a little piece of hundreds of units spread throughout the nation.
These investments are out of the reach from the average Real Estate investor (known as “retail investor”). These property types are generally only accessible to the “super-rich” with massive amounts of capital and/or leverage. But, REITs are enabling anyone to invest in these type of deals. REITs are a truly “egalitarian” investment vehicle that grants access to previously unattainable ventures. This is fantastic!
5.) Less time and work required before investing
The time needed to execute an investment through REITs is much quicker than the time needed to execute the typical Real Estate deal. For example, the fastest Real Estate investment that I have ever done, was buying a rental property townhouse in a total of 3 weeks. That was incredibly fast. I was able to pull it off so quickly because I was financially ready to purchase, and found a very motivated seller.
Buying a property takes time and considerable effort. First, you need to save money and establish credit. Then, you have to secure a lender, perform market analysis, find a realtor, find the desired home. Finally, you need to negotiate price, inspect the home, execute closing & title duties. With a REIT you can literally get exposure to Real Estate investments in one second, with the click of a mouse.
6.) Instantaneous Liquidity
Another advantage of this approach is that it is very liquid. Being able to buy and sell fast has always been Real Estate’s Achilles heel in my opinion. Liquid Real Estate investing is accomplished by investing in publicly-traded REITs.
These type of REITs operate exactly like a stock trading on a Stock Exchange. There are literally hundreds of publicly traded REITs stocks that you could invest in. When you buy a stock of those REITs you’re acquiring ownership of a little piece of all the Real Estate owned by that particular REIT. And if you desire, you could liquidate your Real Estate position in a second with the click of a mouse. Just like selling Apple stock.
Conversely, the average timeframe to sell a house in the United States is 65 days.
Please note that this is only for Exchange Traded REITs! Private REITs or non-traded REITs are NOT liquid. You might need to hold them for years to realize potential gains! Make sure you clearly understand what type of REIT you’re investing in.
Investing in REITs Conclusion:
As you can see, REITs provide numerous valuable advantages. They are a very efficient way for anyone to invest in Real Estate within a day. For many investors’ REITs are also a great way to diversify their current positions. The reason is that REITs are generally considered “uncorrelated” from other asset classes.
Finally, REITs have a solid track record of generating a very healthy ROI (Return-On-Investment). REITs returns come through both price appreciations as well as solid dividend payments over decades.
Aside from Investing in REITs, there are many other ways you can make money with Real Estate. For example, you can have a very profitable career within this booming industry. Check out my article on 4 Great Real Estate Careers for 2021 and learn how you can actively make money. No investment required!
My ACTIONABLE Tips for Investing In REITS:
If investing in REITs is something that resonates with you, check out the following alternatives. Some options are Publicly traded REITS. Other options are non-publicly traded REITs (were you “privately” pool in your money with other REITs investors).
Investing in Publicly Traded REITs:
There are hundreds of different REITs “stocks” you could invest in that are publicly traded. This means you can buy them with a click of a mouse, just like any other stock such as Facebook, Apple, Tesla, or Netflix. Additionally, you could also invest in Mutual Funds or Exchange Traded Funds (ETFs) that focus solely on REITs.
These funds are a pool of many REIT stocks. Similar to how a mutual fund that focuses on stocks is a pool of several stocks from different companies. Therefore, you get immediate diversification by purchasing these funds. In essence, REITs ETFs operate very similarly to an Index Fund ETF for stocks. Check out my article on “Investing in Index Funds” where I explain how you can get exposure to all the SP 500 companies by buying one Exchange Traded Fund. I also go over the great benefits of executing an Index Fund approach.
While you’re doing some additional research to determine exactly what REITs to invest in, check out my article on the “Best Discount Brokers for 2020“. They offer some great perks like “commission-free” trades and FREE Stocks when you sign up! My current favorites discount brokers are Webull and M1 Finance.
You can easily use either discount broker to buy your publicly-traded REITs or REITs ETFs!
Investing in Non-Publicly Traded REITs:
I find the following two alternatives interesting. Continue doing some independent research to determine if they are the right fit for you.
Diversify (Oriented at Multi-Family Real Estate):
One of my favorite things about this REIT is the low barrier of entry to invest in it. To invest in the Diversifund Growth REIT, you only need $500. This REIT focuses on Multi-Family properties in places like Texas, California, and North Carolina. They tend to renovate the properties, which typically increases cash flow. In their website, they advertise an annualized return of approximately 18% for 2017 and 2018. Finally, this REIT is SEC qualified.
Streitwise (Oriented at Commercial Real Estate):
Similarly to Diversifund, you only need $1,000 to get started. This REIT investment strategy is to focus exclusively on Commercial Real Estate. The REIT is relatively new and was created in 2017 in Los Angeles by a group of veteran real estate investors. Streitwise founders wanted to provide a good alternative that enabled unaccredited investors to get a piece of the commercial Real Estate market “pie”. Typically investing in commercial Real Estate requires an investment of millions of dollars. Streitwise strategy is investing in low-risk rental commercial real estate.
At the time of this writing, they are invested in office space in Arizona, Indiana, Texas, Missouri, California. They also have retail space in Arizona and Texas. They also own a hotel in Oregon. As you can see, this is a very diversified approach aimed at providing clients with consistent high-yield returns. This REIT is SEC regulated.
Note: Always consult with a licensed financial advisor that is fully aware of your specific situation before making any investment decisions. This article is NOT financial advice. It simply provides general information about REITs for educational purposes. For more information regarding investment risks, please read this DISCLAIMER.