How To Invest In Real Estate With Little (or No) Money
Contrary to popular belief you don't need to be rich to invest in real estate. With as little as $100 you can begin building a real estate portfolio.
Real estate is a great investment to have in your portfolio. It's stable, almost always goes up in value, and can generate a passive income stream. The problem is most people don't have the money to buy a piece of property. The high barrier to entry makes real estate inaccessible to most people, but there is a way around it. You can buy "share" in property similar to how you can buy "shares" in a business. Similar to how you can buy stocks in large companies you can by REITs in large real estate holdings.
What Are REITs And How Do They Work?
A real estate investment trust (REIT) is a company that owns, maintains, and manages income-producing properties. REITs came about in 1960 when Congress decided smaller investors should also be able to invest in large-scale, income-producing real estate.
The way a REIT operates is easy to understand. The REIT will use the money from investors to purchase commercial or residential space. Then it will rent out those properties to tenants to generate revenue and distribute the profit to shareholders.
By law, the REIT must distribute 90% of all profits back to the shareholders to qualify as a REIT. Many REITs pay out 100 percent of their taxable income. The payout will be in the form of dividends which are usually paid quarterly but can also be paid out monthly or annually. What this means for investors, is that you will receive a regular income from any REITs you own.
Advantages of REITs
There are many advantages of REITs that make them a more attractive option for investors.
Liquidity - Arguably, the greatest advantages of owning REITs is liquidity. Since more REITs are publicly traded like stocks you can sell them anytime the market is open. Unlike physical real estate, the transfer of shares on a stock market can happen in a couple of seconds for free.
Diversity - Since REITs are a portfolio of properties rather than a single building you are taking on far less risk. Furthermore, since there are dozens of different REITs (e.g. Medical, Hospitality, Telecom) you can diversify to assets that are unattainable for regular investors.
Stable Cash Flow - The primary difference between REITs and other equity is regular cash flow. Placing your money in a REIT allows you to put your money to work and generate a passive income stream.
Types of REITs
There are many kinds of REITs that invest in all forms of property and real estate assets. There are literally thousands of REITs available to invest in but I will summarize the five most common.
Retail REITs - These are REITs that invest in shopping malls and freestanding retail. If you have ever visited any type of shopping center or mall, chances are it was owned by a REIT. Retail REITs represent the single biggest investment by type in America.
- Realty Income Corp. (O)
- National Retail Properties (NNN)
- Slate Retail REIT (SRRTF)
Residential REITs - These are REITs that invest in multi-family rental apartment buildings as well as manufactured housing. The will usually aim to own property in large urban areas (e.g. NYC, LA) where the cost of housing pushes more people to rent instead of buy.
- Preferred Apartment Communities (APTS)
- Apartment Investment Management (AIV)
- Essex Property Trust (ESS)
Healthcare REITs - These are REITs that invest in hospitals, medical centers, nursing facilities, and retirement homes. This is an interesting subsector to watch as Americans age and healthcare costs continue to climb.
- Universal Health Realty Income (UHT)
- Medical Properties Trust (MPW)
- Physician’s Realty Trust (DOC)
Office REITs - These are REITs that, unsurprisingly, invest in office buildings. They receive rental income from anchor tenants who have usually signed long-term leases.
- Boston Properties (BXP)
- SL Green Realty (SLG)
- Hudson Pacific Properties (HPP)
Specialized REITs - Companies involved in real estate ventures that do not fit in the categories mentioned above are considered specialized REITs. They include companies that own cell phone towers, data centers, eCommerce warehouses, and much more. The primary advantage of investing in such REITs is the ability to capitalize on the growth of a specific industry like 5G communication or eCommerce.
- Equinix (EQIX)
- American Tower Corp. (AMT)
- Extra Space Storage (EXR)
All-In-One - These are usually ETFs which are a collection of REITs and can be thought of as a portfolio of portfolios. They allow anyone who's totally new to REITs to build a really low-risk portfolio with a purchas of a single ETF.
- Vanguard Real Estate ETF (VNQ)
- Fidelity MSCI Real Estate Index ETF (FREL)
- Schwab US REIT ETF (SCHH)
How Can I Start Investing in REITs?
If you've made the decision to begin investing in REITs you need to open a brokerage account and fund it with the money you plan on investing. There plenty of options out there but I recommend WeBull.
It is a free trading platform designed for professional traders. The lack of fees will help you increase your returns and the professional research tools will help you make a better decision on what REITs are good investments.
The platform is also running a promotion where they are offering 2 free stocks valued up to $1000 each to all new investors. This is a great way to start of any portfolio so check out this article if you want to learn more about WeBull or sign-up here if you're ready to get started.