Why You May Want to Invest in an REIT Instead of Being a Landlord

Did you know that there are alternative investments to the stock market that could be game-changers for the way you invest? Real estate is probably one of the more popular methods to these alternatives, and the traditional route to investing in real estate is by becoming a landlord. You buy property, rent it out, and balance expenses against revenue. In this kind of work though, there are a lot of deterrents; it can be a huge commitment, with pretty big risks. A real estate investment trust (REIT), on the other hand, is a fantastic alternative to becoming a landlord yourself. It's a laughably simple, but lucrative, way to add real estate to your investment portfolio without really needing to get out there and do the work yourself, or know too much about the industry. Obviously, you'll want to do your market research, but you don't have to be an expert on cumbersome things like rental repairs, maintenance, taxes, etc. If you're looking to get in on the real estate market, you may want to invest in an REIT.

What an REIT Is and Does

An REIT is, basically, a company that acts as landlord to their properties by owning and financing them, taking care of maintenance, emergency repairs, and other types of renter issues. By investing in the REIT, you essentially invest in income producing real estate without having to do the work. It gives you the best of both worlds, the stability and ease of investing in major stock exchanges, as well as getting involved in the real estate market, without the hassle of becoming a landlord yourself. You still invest in the real estate market, but you do so by buying shares of a publicly traded REIT, just like you would any other company you'd like to invest in. Through this route, you can get a steady income through REIT dividends rather than relying on your own ability to balance income and expenses.

There are actually two major types of real estate investment trusts, equity and mortgage, and they're exactly what they sound like. Equity REITs are a sort of company-landlord, which invests in and buys properties. If you're debating between becoming a landlord yourself, and investing in an REIT, it's equity REITs that make the most direct comparison. Mortgage REITs, on the other hand, are companies that own and invest in property mortgages. Both kinds of REITs offer investors the opportunity to enter the real estate game without having to handle the nitty-gritty details of owning, renting, or mortgaging.

There are just a few more necessary features a real estate company must have to be publicly traded in major stock exchanges. First, they must have at least 100 shareholders. Second, they must put 90% of their taxable income out in the form of dividends.

You don't have to handle the dirty work.

Investing in an REIT, rather than becoming a landlord yourself, saves you a tonof hassle. You don't have to fix damages, pay for broken down appliances, make other repairs, contract out any plumbing or electrical work that you can't do yourself, or any of those exhausting tasks that fall on a landlord to handle. The REIT is basically a landlord in and of themselves, and you simply reap the benefits of their work through the REITs dividends. You save yourself all of the work that can make being a landlord quite unglamorous, and avoid making costly mistakes through shoddy repairs, or unreliable contractors. After all, an REIT is an entire company dedicated to that sort of thing, and so are much better equipped to find the best quality work for the best price than your average Joe.

You don't have deal with renters.

As well as handling the laborious tasks of maintenance and repairs, REITs deal with renters. This can be an exhausting task for landlords. In an ideal world, the process of choosing renters, handling the paperwork, and fielding any questions or issues down the line would be a simple one. However, in the real world, people are unpredictable, and renters can be a huge headache to a landlord. Investing in an REIT saves you those headaches so that you can reap the benefits of their expertise through the REIT's dividend without having to navigate all of the potentially exhausting renter-landlord relationships.

You don't have to be a financial or real estate expert.

In order to truly succeed as a landlord, you kind of have to be a jack of all trades. There's the maintenance and repair aspect, the renters aspect, and, of course, the financial decision-making aspect. A landlord has to become an expert on all sorts of financial issues, from taxes and tax write-offs to interest rates to depreciation. If not, they would then need to at least invest in professional accountants, which can be a further financial drain in a long term scope.

By investing in REITs, you also don't have to deal with the hassles of finding, buying, and selling properties, which are areas where many real estate investors make unfortunate, often costly, miscalculations.

It's safer.

Doing it yourself means you reap allof the benefits of success. That means, as you can guess, becoming a landlord has a higher potentialthan you might have if you just invest in REITs. If you're a real estate expert operating in a still-lucrative market for it, the landlord route, or flipping houses, might be the better bet for you. For the overwhelming majority of people however, the risks of doing everything yourself can be massive.

Some of the 11 worst real estate mistakes people make stem from being a landlord. There are, simply put, waytoo many mistakes that landlords can and do make which can seriously harm their profits, even to the point of having to get out of the real estate market. No one is an expert at everything, and you're almost guaranteed to lose out sometimes. In the field of real estate, your own miscalculations, tax errors, and even just getting scammed by maintenance and repair companies could put an end to your career quite quickly. REITs are companies dedicated to this industry, and so they know the market and business better than anyone. This means that, in general, they can better maximize the profits of their income, a benefit that reaches you through the REITs dividends.

It diversifies your portfolio for you.

It's also a safer investment technique than being a landlord because this type of investment reduces risk by spreading your invested money out. Putting all your eggs in one basket has the potential to pay off, but it's a massive risk that many people can't afford to take. As anyone with any investment knowledge at all knows, diversification is the key to a stable investment portfolio. If you're not the risk-taking type at all, REIT exchange-traded funds (ETFs), offer investors the opportunity to further branch out and invest in a range of REITs, creating an even more diversified portfolio. This way, you're never really at risk for the kinds of sudden, massive losses that landlords are susceptible to.

It's more stable.

Investing in an REIT gives you a lot of protection from otherwise disastrous market fluctuations, as well as the current market trends that may be harmful to DIY investors.

Obviously, rent climbs when inflation climbs. In the last few years however, the change in inflation rates has actually been much higher than the changes in rent costs. Since this trend seems very likely to continue, it's easy to see how landlords will be losing out more and more of their income if rent costs do not keep up with national inflation changes.

It saves money for everyone.

REITs don't have to pay federal income taxes. This is because they are required to pay 90% of their profits out in dividends, which means high dividend yields for the investor. While this does mean that REITs have limited funds for growth, and therefore grow and expand somewhat slowly, it also means that investors reap huge gains from the company's success, and that those yields are low-risk while still offering steady income. Plus, investing in an REIT keeps your money available. You can very easily pull out any time, further decreasing the investor's risk and worry.

You're still actively involved in your investment.

Many of the perks of investing in an REIT, rather than becoming a landlord, involve what you don't have to do. REITs take care of just about everything with regards to the property, the renters, the finances, etc. But that doesn't mean that this kind of REIT leaves you twiddling your thumbs and out of the game entirely. Instead of handling those headache-inducing things yourself, you're investing in a company to take care of it, and are guaranteed to see the returns, as REITs are required by law to pay out 90% of their income in dividends. This means that your main job in this kind of real estate investment is simply choosing the right REIT. As with any other stock, REIT stocks vary in value, and fluctuate over time. Luckily, you can make educated decisions about what REITs to invest in based on various important factors, especially anticipated growth (in earnings per share), current REIT dividend yields, and funds from operations (FFO), which is a more accurate indication of a company's cash flow.

Considerations Before You Make Your Final Decision

Investing in REITs is a stable, long-term investment in the real estate market. It's safer, more stable, and wayeasier than being a landlord and doing everything yourself. For these reasons, REITs might be the better option for many potential real estate investors.

In order to invest in an REIT, it's important to remember a couple of things. First of all, as a landlord, you have much more control. You make your own decisions, and you reap all of the benefits of your success. REITs, on the other hand, can only get you so much, as you are only a partial shareholder in a distributed company. With that in mind, there's very low risk to the shareholder in this case. Yes, you reap all of the benefits of your success as a landlord, but you also have little to no buffer against the consequences of your failures, unlucky market changes, or emergencies. Before you invest, think carefully about the kind of investor you are, the risk you can reasonably afford to take, other tips for real estate investing in 2018, and the amount of work you really want to put into this thing.