Did You Know You Can Invest in Real Estate Without Tens, or Hundreds of Thousands of Dollars?

Are you wanting to get into real estate investment, but think you’re stuck because you don’t have hundreds of thousands of dollars saved up?

It’s common misconception for people to think that you need to have tens or hundreds of thousands of dollars in the bank, or need to go out and physically buy a property in order to enter the property market for investments.

Now, this might be true if you’re planning to invest into physical properties and are planning to actually purchase a house or apartment as an investment.

However, there’s actually another way to invest in property through buying assets that many people don’t know about.

These assets are known as Real Estate Investment Trusts, or REITs.

This investment vehicle can open up the prospect of property investment to practically anyone, even allowing people like students and children to get started with investing in the property markets.

Let’s explore what REITs are and how you can take advantage of this unique investment vehicle!

What are Real Estate Investment Trusts (REITs)?

REITs are a certain type of business or company that generates the majority of their income from real estate investments of their own.

In a nutshell, REITs allow individuals to invest in a professionally managed real estate portfolio without having to face the hassle of directly buying, owning, or managing properties.

All of which are actions that can be extremely time consuming and frankly, difficult to keep on top of unless you’re an experienced professional.

What Am I Actually Investing In?

Essentially, buying into a REIT will mean that you’re purchasing shares or stocks of a company as you normally would when investing in the stock market, but the main difference is that the main assets of these companies are their real estate investment portfolios.

Instead of selling products or services, they invest in real estate and look to generate returns and profits.

So, by buying into a REIT, you’re essentially investing in a company whose main source of income is through real estate investment profits.

In order to be considered a REIT, the company must invest at least 75% of its assets into a real estate portfolio, and derive at least 75% of its total revenues from real estate-related investment activities.

How Do REITs Offer Returns to investors?

One really unique feature about REITs is their profit distribution regulations.

In contrast to other types of companies, REITs are required to distribute at least 90% of their taxable income as dividends to shareholders and investors.

That means only a maximum of 10% of the taxable income generated through the REIT can be reinvested to purchase more real estate or invested back into the portfolio (such as through upgrades, renovations, etc.).

How Does Investing in REITs Work?

Income and Profit Generation

When you, as an investor, buy into a REIT, you can expect to receive the majority of your gains from that investment through the form of dividends.

Dividends are paid out to shareholders by REITs as a means of passive income; it is the distribution of the profits generated.

For investors, this means a stream of passive income like you would expect through rental income, without the hassle and extra risks that come with being a landlord of a physical property.

REITs can provide you with consistent, stable cash flow from your investment, which would simulate the rental income you’d expect to generate from actually purchasing a property.

However, this does also come with a caveat.

Since only a maximum of 10% of the income generated from the REIT can be reinvested back into the portfolio, you shouldn’t expect much capital appreciation, or for the size of your investment to grow that much over time.

Think of it like this: if you were trying to generate income from your stock portfolio but could only reinvest a maximum of 10% of the profits you earned back in to hopefully generate more returns, you’d struggle to grow the portfolio as well!

At least, without putting in more money of your own anyways.

Professional Management

As an investor, you will benefit from the expertise of real estate professionals and experienced investors without having to deal with the day-to-day pains of managing properties.

Similarly to the process of investing into ETFs or mutual funds, REITs will pool the capital by shareholders and use that to generate more income, to be distributed in the future.

If you’re reading this, chances are, you haven’t ever invested in property before.

Trust me when I say, it is extremely difficult, and there are a lot of risks associated with it.

Many people are under the impression that as long as you have enough money to get into the market, you can generate heaps more money.

That simply isn’t true.

Investing in a REIT is going to allow you to enjoy the benefits of being on the same side as experienced professionals in the real estate industry.

However, while this is all great, the fact that the portfolios are professionally managed does mean that you might have to expect management fees for your investments that are higher than you would normally expect for ETFs and mutual funds.

A Diverse Real Estate Investment Portfolio

REITs can often cover various real estate sectors, including residential and commercial properties, hotels, shopping centers, apartments and infrastructure.

By diversifying their portfolios, the experienced professionals and investors at the REIT are able to spread their risk and gain exposure to different opportunities in the real estate property.

A REIT will also give you, as the individual investor a chance to diversify your portfolio, away from purely regular company stocks like Google and Tesla.

Accessibility

Individual investors can buy and sell REIT shares just like stocks on major stock exchanges.

REITs are stocks, just sorted into their own category.

Just like ‘tech stocks’ or ‘consumer staples’ stocks, REITs are in their own category.

This means practically anyone who wants to can invest into REITs, and tap into the property markets as a way to invest into real estate without having to deal with all the other implications and considerations that make investing in real estate so difficult.

This includes students and teenagers who are old enough.

The Different Types of REITs:

It’s important to note that there are various types of REITs that focus on different aspects of the real estate market, including:

Equity REITs: REITs that own and operate income-producing properties.

Mortgage REITs: REITs that invest in mortgage-backed securities or real estate mortgages.

Hybrid REITs: REITs that combine elements of equity and mortgage REITs; essentially a combination of the other two.

The Benefits of Investing in REITs

Diversify Your Own Portfolio

Since REITs are another category of stocks that you can easily access on the stock exchanges and brokerages you use (such as TD Ameritrade or Sharesies), investing into them can help diversify your own investment portfolio.

Instead of only being invested into the common types like ‘tech stocks’ (think Google and Nvidia) or ‘pharmaceutical stocks’ (think Pfizer or Eli Lilly), you can invest into real estate companies as well!

Generate a Source of Passive Income

Passive income seems to be the holy grail that everyone is chasing these days.

Well, REITs are going to offer the majority of their returns on investments in the form of dividend payments, which are about as passive as income can get.

However, this does come at the cost of a heavily reduced prospect for capital gains and appreciation, so that’s something to keep in mind.

Accessibility and Liquidity

Real estate investment trusts require a much lower upfront capital investment than physical real estate, which makes them a million times more accessible to a wide range of investors than investing in physical properties is, even for people like students and teenagers as well.

On many stock brokerages, you can invest with as little as a few dollars, or even a few cents, meaning you won’t have to take on huge amounts of risk by putting in lots of money.

This means you can break into the property investment markets without needing to spend tens and hundreds of thousands of dollars for down payments and to take out mortgages to fund your investments.

On top of this, since REITs are generally traded publicly on stock brokerages, you can buy and sell these shares whenever you want.

It’s not like investing into a physical property where you’d have to be able to find a buyer in order to be able to sell your house or piece of real estate.

You can’t get trapped by owning an investment you don’t want to hold onto anymore, as you can buy and sell these REIT shares whenever you want, just like you’d be able to with regular stocks.

The Difference Between REITs and Real Estate Indices/Real Estate ETFs

Lastly, I’ll quickly go over the difference between REITs, and real estate ETFs, which are another popular way for everyday investors to invest into the property market.

REITs, as explained throughout this article, allow you to invest into a company that primarily earns their income through their own real estate investments.

On the other hand, real estate ETFs, which are mutual funds that are also traded publicly on stock exchanges and brokerages, allow you to specifically track the performance of whichever market you’re investing into.

For example, if you invest into a real estate ETF that tracks the performance of the US housing market, that means if the average house price in the US goes up, so will the value of your investment.

This is even more closely simulated with actually investing into property, as you’re betting on exactly what you would be if you actually bought an investment property.

With real estate ETFs, you’re betting for the price of the asset(s) to increase, whereas for REITs, you’re betting on the performance of a company that invests in real estate themselves.

Many large asset management companies like Vanguard or iShares will offer their own real estate ETFs, just like they do for lots of other industries like tech ETFs, geography-specific ETFs, etc.

To Sum It Up

All in all, REITs offer everyday investors an awesome way to tap into the property markets and generate returns for themselves through these investments without the hassle or stress of actually needing to purchase physical properties.

They’re also a great tool you can use to diversify your investment portfolios and reduce your risk, however it’s important that you understand how they work and do your own due diligence before investing your capital.

I hope you’ve learnt something from this article and have enjoyed reading through it.

If you’d like to learn more about becoming the highest performing student you can be, check out the rest of the Medium publication, Grad Excel!