OCTOBER 2, 2015 BY Michelle Schroeder-Gardner - 16 COMMENTS
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The Perfect Passive Income Real Estate Investment - REITsHello! Enjoy this blog post from a blog friend of mine.
An investment in REITs offers the benefits of real estate investing without the hassle of buying individual properties. Find out why it should be part of everyone’s investment strategy.
Ever since Will Rogers made his famous quote about real estate investing in the 1930s, people have been lining up for their share of the profits. Few investments have created as many family legacies and created more wealth than real estate.
My own experience in real estate investing started in 2002, just after getting out of the Marine Corps. I took a job as a commercial property agent and started rehabbing single-family houses for rent in my spare time. Of all the passive income strategies in which I’ve invested, real estate has been my favorite,
…and also one of the most frustrating.
Promises of a six-figure income as renters pay off your mortgages and investing strategies that involve little more than collecting your checks are about as far from reality as a bad sci-fi flick. I had as many as six properties before selling all but a couple in 2006. Phone calls come in at all hours of the night for repairs and bookkeeping alone can be a part-time job.
I still own a few rental properties but have found a better investment in real estate. one that offers the upside of real estate but without the tenant hassles and large down-payment of buying property.
Besides a great opportunity for real estate-related profits, the investment has beaten the return on stocks over the last four decades. It’s one of the few investments that everyone should put in their portfolio.
Real Estate Investing without the Headaches and Hassles
Real estate investment trusts (REITs) are a special type of corporation established by law in 1960. These companies own real estate properties and do not have to pay corporate income taxes as long as they pay out at least 90% of income to investors.
As you can imagine, not having to pay corporate taxes is a huge advantage and REITs hold more than $2 trillion of commercial real estate in the United States and globally. Companies like McDonald’s and Sears have considered selling their real estate into a REIT and then just renting it back to benefit from the tax advantages.
For investors, this means a strong source of income from your investment. According to the National Association of REITs (NAREIT), the average dividend yield of 4.1% is nearly twice as much paid by stocks in the S&P 500 with an average 2.1% dividend yield.
Most REITs invest in commercial real estate along a specific segment like office, industrial, health care or multi-family residential. The company manages the properties and sells shares to investors just like any company in the stock market.
The great thing about investing in REITs rather than directly buying properties yourself is that you get instant diversification across hundreds of properties and professional management. You don’t have to worry about a drop in the local economy and the rental market, a big problem for most individual real estate investors.
Beyond the cash flow you get from REITs, they also provide a solid return on the price of the shares. REITs averaged an annual return of 13.5% over more than four decades to 2013, well above the 10.2% annualized return on stocks in the S&P 500.
How to Invest in REITs
There are hundreds of different REITs in which you can invest. As with any sound investing strategy, you should diversify your investment across multiple companies so you aren’t overly exposed to problems at any specific one. You’ll want to look into buying REITs that own different types of commercial properties as well as those that hold properties across the country.
One popular strategy for many investors is to buy shares in a REIT fund, an investment that itself holds shares in individual REITs. Buying shares of a fund like the Vanguard REIT ETF (NYSE: VNQ) gives you a share of the 145 different REITs in which the fund invests, immediately spreading your investment out across different property types and different locations.
REITs may not offer the upside potential of owning your own real estate properties and I still like the pride of ownership I get from developing real estate. As for a source of passive income, it’s tough to find a better investment than REITs. Like any one investment, you shouldn’t put all your monetary eggs in one basket but putting some money to work in REITs is something everyone should consider.
Author bio: Joseph Hogue, CFA is an investment analyst and author of The Passive Income Myth: How to Create a Stream of Income from Real Estate, Blogging, Stocks and Bonds. Join the community on PeerFinance101 for more tips on investing, managing debt and reaching your financial goals.
Are you interested in investing in REITs? Why or why not?
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16 COMMENTS
FILED UNDER: EXTRA INCOME, REAL ESTATE, RETIREMENT
TAGGED WITH: EXTRA MONEY, HOME, HUSTLE SERIES, RETIREMENT
About Michelle Schroeder-Gardner
Michelle is the founder of Making Sense of Cents, a blog about personal finance and traveling. She discusses how her business has evolved in her side income series. She paid off $40,000 in student loans by the age of 24 mainly due to her freelancing side hustles. Click here to learn more about starting a blog!
Comments
Kristi @ Femme Frugality says
October 2, 2015 at 4:31 am
Great post, Joe! I haven’t yet gotten involved in REIT investing, but it is definitely something I am considering once we are able to pay off our debt.
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Joseph Hogue says
October 2, 2015 at 12:01 pm
Thanks Kristi. I love REITs and they’ve done really well for decades. Some are worried about rising interest rates and the affect on real estate but the long-term potential is still excellent.
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Elizabeth | Something Saturdays says
October 2, 2015 at 6:25 am
Thanks for the post, I have been looking at investing in REITs lately – great info!
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Joseph Hogue says
October 2, 2015 at 12:03 pm
Thanks Elizabeth. Let me know if you have any questions on REITs.
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Penny @ She Picks Up Pennies says
October 2, 2015 at 7:17 am
I definitely see the appeal of REITs versus dealing with rental properties yourself. I’m not currently involved in either at the moment, but I think a REIT has far more appeal. I mostly don’t think I have the temperament necessary to be a landlord. I’m far too much of a control freak.
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Joseph Hogue says
October 2, 2015 at 12:05 pm
I know exactly how you feel Penny. I thought I was going to build my real estate rental ’empire’ in my 20s and quickly realized it’s a lot more hassle than most know. Still own a few but far prefer REITs.
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Carey says
October 2, 2015 at 7:19 am
Thanks for the post. Following the downturn in real estate 6 or 7 years ago, I was wanting to invest in REIT’s that focused on a particular state. In other words I wasn’t interested in California real estate because of its slow recovery, but I was interested in Texas real estate. I could not find an REIT with such a focus; are there any now that you’d recommend? Thanks!
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Joseph Hogue says
October 2, 2015 at 12:16 pm
Thanks Carey. While some REITs will have the majority of their holdings in a region, most have at least some all over the country. I can understand the reluctance to California RE, the San Fran market looks like it is just as much a bubble as it was in 2006. Diversification is the key, different property types and different regions to smooth out any particular problem.
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ChrisCD (@jumbocds) says
October 2, 2015 at 8:47 am
I have a Schwab brokerage account and their REIT ETF is one of my holdings. Its average annual return has been around 3% including dividends since I have owned it. I don’t recall how long this particular one has been around, but the notes online indicated an 11% return since inception. I’m not sure if that was an annualized return or not.
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Tawcan says
October 2, 2015 at 10:10 am
I love REITs and hold a number of REITs in our portfolio for the reasons that you mentioned above. They’re definitely real estate investing without the headaches and hassles.
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Neil says
October 2, 2015 at 11:34 am
Great info. I like the idea of real estate exposure without the headache of owning a rental property. Thank you for the insight.
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Jack says
October 2, 2015 at 4:25 pm
Personally, I’d rather desk with the hassles myself. Know my market, pick my properties, and know what I’m getting into.
While the hands off approach is convenient, you give up a lot of control, and in some cases there a loss of a sense of obligation or responsibility to you the investor which turns into higher fees and loss of profits.
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Sofy Johnson says
October 3, 2015 at 2:30 am
Real Estate investment is the best option, but before making investment it is necessary to do analysis of the required amenities for making better investment.
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Steve Miller says
October 4, 2015 at 11:02 am
Hey Michelle — Have you invested in REITs as Joe has? I’ve been looking at them but I think investing in index funds has a better return. Thoughts?
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Beverley @ sweaty&fit says
October 6, 2015 at 9:38 am
Great post on REITS! I have invested in a retirement home REIT, and it’s the only one of my investments that has not gone down since the market started doing badly. Sooo, best decision i think i could have made! Definitely interested in looking into another one though, since buying a house is not really an option for me right now. Thanks for sharing this!!
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Kimberly Gayeta says
January 8, 2016 at 4:10 am
Thanks for sharing your thoughts!
I’ve been in the real estate industry for quite a while now, and all I can prove is that aside from REITs, a great attorney is also an advantage! They simply know where he money is.
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