A real estate investment trust (REIT) could be a good investment if you are looking to invest in property, but don’t want to be a landlord
Q: I have been listening to your show through iTunes and have learned a lot over the past few weeks. Thank you for the information you share.
After listening to the show outlining the opportunity for real estate investors, I was wondering is investing in real estate investment trusts (REITs) a viable alternative to buying and renting properties? What would be the pros and cons and what should I look out for if taking this route is workable?
A: We’re glad you asked. While this may be the single best time to purchase investment property in the last 50 years (or next), there are some investors who just aren’t cut out to be landlords.
The day-to-day management of 50 or 60 pieces of real estate isn’t for everyone. Ilyce recently spoke with a gentleman on her radio show who purchased nearly 70 pieces of investment property for cash since 2008, and now has a monthly income in excess of $40,000. He manages to take care of all of the properties while still holding onto his day job. (His four daughters have all gone through foreclosure, but that’s another story.)
That kind of inventory requires a tremendous amount of discipline and focus. Even if this gentleman has two people working for him, it would be tough to make sure all of the properties are rented, that rents are being paid on time each month, that the tax bills for the properties are paid on time and that the properties are properly maintained.
Even if you don’t have 70 properties, managing investment real estate requires organization and a willingness to deal with tenants. Quite simply, it can be a lot of fuss and not everyone is cut out to be a landlord.
For those who want to invest in real estate, but aren’t ready or willing to be a landlord, you can explore the world of real estate investment trusts (REITs).
REITS are a collection of income-producing property or mortgages against a certain type of real estate. According to the website for the National Association of Real Estate Investment Trusts (NAREIT), the nonprofit trade association for the industry, to qualify as a REIT, “a company must have most of its assets and income tied to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs historically remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax. Taxes are paid by shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. Like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.”
While REITs must pass at least 90 percent of its taxable income to shareholders, it’s difficult to know if smart decisions are being made within the REIT as to how expenses are paid. Also, because REITs produce dividend income for their shareholders, the stock price generally doesn’t go up as quickly. When evaluating a REIT, it’s important to know what the underlying holdings are, what kind of income has been produced, what the REIT’s history of dividends has been, what its projections are for future income and how easy or hard will it be to sell the REIT shares when you decide it’s time to sell.
At NAREIT.org, you can search for information about a particular REIT, or look up information about REIT sectors. There is an excellent REIT 101 section with basic information about REITs that would be helpful for anyone considering this as an investment. And as with any investment, past performance is no guarantee of future results.
But the biggest difference is that with a REIT, you get to be a passive investor in the real estate market, and you can diversify your portfolio to spread around the risk. Instead of buying one house, you might be investing in a REIT that owns 10,000 investment properties. But as with any other investment choice, you might choose well and be happy, but you could also choose the wrong REIT and later regret it.
You should also know that there are other ways of investing in real estate. Depending on your federal income tax situation, you can also invest in mutual funds that invest in homebuilders and other real estate companies. You have a wide variety of choices of where to invest your money, but you need to have a goal in mind, determine the benefits that any investment would give you and then decide on the risks you are willing to accept.