REITs: Buying Real Estate without Large Amounts of Capital

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HouseEven after the recent real estate market crash (and perhaps because of it), there are plenty of people still interested in investing in property. However, many of us don’t have the capital available to buy up real estate. Additionally, considering the financial situation that many find themselves in as a result of the financial crisis, it might not be feasible for many ordinary investors to borrow enough to buy real estate.

For those who are interested in real estate, but don’t have the capital, or those who think that buying actual property isn’t the best investment, there is another option. It’s possible to invest in Real Estate Investment Trusts.

What are REITs?

Real Estate Investment Trusts (REITs) are actually securities. They sell like stocks on major exchanges, even though they are actually collections of different investments. In a way, it is sort of like investing in a fund made up of real estate assets, although the trust structure is a little different. There are different options when it comes to investing in REITs:

  • Equity: These types of REITs own and invest in actual properties. Revenues/returns come from the rents that owners receive from the properties. Equity REITs are responsible for the value of their assets.
  • Mortgage: When you invest in a mortgage REIT, you are choosing a security that is related to mortgages. The REIT owners lean money to those that own real estate, or they purchase mortgages and mortgage-backed securities. Your returns come from the interest generated from the property loans.
  • Hybrid: As you might imagine, these are REITs that include both types of real estate investments.

It’s also possible to choose REITs that specialize in certain types of property, such as commercial or residential. Because REITs can be traded on stock exchanges, they are quite liquid. You can get the benefit of adding real estate assets to your investment portfolio, but without the illiquidity and large capital requirements that come with actually buying property on your own. REITs are ideal for those who wish they could invest in real estate, but don’t have the means to buy a rental property.

REITs and Dividends

It is also worth noting that their structure requires that REITs pay a very substantial portion of their profits back to investors in the form of dividends. So, if you are interested in earning a little extra, in the form of dividend payouts, REITs can provide you with an interesting option. It’s possible to use REITs in your dividend income portfolio, helping you create a passive income stream down the road.

You do need to be careful, though. As with all investments, there is the risk of loss. Since you are exposed to real estate investments, you are also exposed to the ups and downs that can come with the real estate market. If there is another crash, or if a number of defaults take place in a mortgage REIT, you sustain losses. You will need to assess the situation, and your risk tolerance. Make sure you understand the risks and rewards associated with REITs before you invest.

(Photo: Images_of_Money)

{ 6 comments, please add your thoughts now! }

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6 Responses to “REITs: Buying Real Estate without Large Amounts of Capital”

  1. REITs have been very kind to us. Several REITs specialize in certain types of properties, e.g. shopping malls, hotels. etc.

    There are two kinds of REIT stock: common and preferred. The downside of the preferred is the dividend stays fixed, but the upside is they currently run around 7-8% and (importantly) when dividends are suspended, they still keep accumulating. That is not true for the common.

    In 2009, we were able to pick up lots of REIT preferred stock after they announced a suspension of their dividends, for really cheap. As I recall, the yield (when they resume paying of course) was around like 20-30%. By now I believe most or all have caught up with their preferred dividends, because they are not allowed to pay dividends to common stockholders until the preferred holders are caught up.

    And since preferred is a usually a really small portion of overall stock, it usually doesn’t take much to get them caught up.

  2. ChrisCD says:

    Does a REIT ETF expose you to less risk? I do have some funds in a REIT ETF and I figured because it is investing in a basket of different REITs it would be less risky. Plus it has a very low cost.

  3. I’ve thought about REIT’s for a while now, I think I’d tend to go more for the equity type though b/c that is not my expertise: collecting rents, renting out, etc.

    If I bought a property on my own, that is probably where I would struggle, but it would be nice when it came time to sell if the property has appreciated, and I don’t have to pay taxes on my capital gains 🙂

  4. Michal says:

    REITs is completely new investment field for me. I invest money in stock and forex market but still awaiting for desirable success. REITs may be a nice option for me to test my luck.

    If I am not wrong then it is just like stock trading and there is also risk. Thanks Miranda and William to share detailed, informative and useful(for me) facts about REITs.

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