Contrary to what many people think, there is more than one way to invest in Real Estate. One way is talked about on the radio show right before ours (I’ll call that the traditional way), and that way is to purchase a physical piece of property. As most of you reading this know, this way has a lot of upsides, and a lot of downsides.
There is no better feeling than owning your own property. It provides a sense of pride, it gives you shelter, it is a place that you can raise a family, it makes you part of a community, and it can be a lot of fun to put your own personal touch on it. In addition, many times, if you own the right property, you can realize appreciation on the property and realize a nice profit when you sell it. All of that is great. However, there are a lot of downsides to owning physical property, too. First of all, the transaction costs of buying and selling a property are high relative to other investments. Off the top, you have to pay a broker around 6% to sell a property. Then there are the countless other costs that occur at closing such as title insurance, appraisal fees, surveys, etc… Then there are the costs associated with holding a property which include taxes, insurance, maintenance, and any desired upgrades. How many times has your hot water heater broken or your AC broke in a month where you just didn’t have it in the budget to fix it?
These same things are true when you buy real estate for an investment. The rental income is great, especially if you pay cash for the property or have a rental that pays more than the mortgage. But what about months where the property sits vacant? You still have all the associated costs of the property, but no income. That can really damage the returns on your investment.
What if I told you there is another way to buy, hold, and sell real estate and you don’t have any of these headaches? Well, there is, and it is called a REIT. REIT stands for Real Estate Investment Trust. REITs hold, and in most cases, operate real estate, including renting, operating, maintaining, buying, and selling physical property of all different types. Some REITs also provide financing for other entities to purchase real estate.
REITs were created in 1960 under the REIT Act title. The goal of Congress in creating this asset class was to give investors a way to buy real estate the same way they purchase other securities, by purchasing and selling liquid securities.
In order to qualify as a REIT, a company must:
- Invest at least 75 percent of its assets in real estate
- Derive at least 75 percent of its income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay at least 90 percent of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation and is managed by a board of directors
- Have a minimum of 100 shareholders and no more than 50 percent of its shares held by 5 or fewer individuals
The benefits of holding REITs in your portfolio include diversification, income in the form of dividends and potential for price appreciation, low trading costs, and liquidity. Additionally, REITs can be held in an IRA, something that is possible to do with physical property, but complicated and expensive. However, the most appealing thing about owning a REIT is that you don’t have to be a landlord!
As of June 30th, there are currently 195 REITs traded on the NYSE with a market capitalization of $838 billion, according to NAREIT, the National Assocaiation of REITs. They specialize in many different areas, from commercial buildings, to residential buildings, to medical buildings, and just about anything else you would like to invest in.
If you are interested in purchasing real estate in the form of a REIT, call us at 904.685.1505. However, if you are interested in purchasing an actual property, please don’t call us, call a licensed real estate agent. Before making any investment, please consult your fee only CFP(R).