How to Buy Real Estate with No Down Payment, No Mortgage and No Land Contract…Ever!
I know what you are thinking—just another misleading headline to attract attention. Nope! The Real Estate Investment Trust (REIT) really does allow you to invest in real estate with none of the entanglements you normally associate with owning property and it is as easy as buying stock.
The Real Estate Investment Trust is an indirect means of investing in real estate which does not require enormous capital investment. In short, it puts various types of real property investment within the grasp of the average investor.
Let Me Explain
The REIT, or to be specific, the Real Estate Investment Trust, is a security that trades like a stock in much the same way as a mutual fund. There are three basic types of REITs.
- Equity Real Estate Investment Trust — these types of REITs are composed of owned real estate and profits are derived from rent/lease payments.
- Mortgage Real Estate Investment Trust — these are composed of real estate mortgages and profits are earned from interest payments and various fees. Just to be clear, this REIT is comprised of a portfolio of mortgages, not real property.
- Hybrid Real Estate Investment Trust — the hybrid REIT is, just as its name implies, a combination of the Equity REIT and the Mortgage REIT.
Of course, there are many other specialized Real Estate Investment Trusts such as Apartment Real Estate Investment Trusts and Multi-Family Real Estate Investment Trusts. However, they all fit into one of these three main categories, the names are just more specific with regard to their holdings.
Pros and Cons
REIT’s are very popular among certain investors and REITs, in comparison to many dividend stocks, pay comparatively attractive yields. However, on a personal level, I remain wary of real estate as an investment. That said … here are the pros and cons.
Five reasons to Consider Investing in Real Estate Investment Trusts
- Portfolio diversification
- Liquidity – in an otherwise illiquid asset
- Performance – slightly underperforms the broader market in a bull market period, but outperforms in bear market times, making these securities a great “hedge”
- Dividends – by law, US Real Estate Investment Trusts are required to pay out at least 90 percent of taxable income to their shareholders in the form of dividends
- Governance – recognized by RiskMetrics Group as among the best in the stock market
Three Reasons to Avoid Investning in REITs
- The performance of REITs is heavily dependent on interest rates, making them a higher risk investment as interest rates rise.
- Investors looking for capital appreciation will be disappointed by REITs because they must distribute at least 90% of pre-tax earnings to shareholders in the form of dividends.
- Dividends are taxed as regular income and may be a poor choice for investors seeking tax deferred or non-taxable income.
This popular investment vehicle is being adopted by several countries in Southeast Asia. Real Estate Investment Trusts have recently been authorized in the Philippines, Singapore and India. Without getting too far into the weeds, investing in foreign REITs can offer some protection against a falling dollar.
Of the 183 publicly traded domestic Real Estate Investment Trusts, 83 are equity REITs that own and most often manage commercial real estate and derive most of their revenue and income from rents, so finding one that you like should not be a difficult proposition. I can’t think of a less expensive way to get your “Trump” on!
What about You?
Do you have any REITs in your portfolio? How do you feel about REITs as an investment? Any experiences to share?