You Might Be a Real Estate Investor And You Didn't Even Know It
Talk about a fun surprise!
Talk about a fun surprise!
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels and commercial forests. Some REITs engage in financing real estate.
Most countries' laws on REITs entitle a real estate company to pay less in corporation tax and capital gains tax. REITs have been criticised as enabling speculation on housing, and reducing housing affordability, without increasing finance for building.
REITs can be publicly traded on major exchanges, publicly registered but non-listed, or private. The two main types of REITs are equity REITs and mortgage REITs (mREITs). In November 2014, equity REITs were recognized as a distinct asset class in the Global Industry Classification Standard by S&P Dow Jones Indices and MSCI. The key statistics to examine the financial position and operation of a REIT include net asset value (NAV), funds from operations (FFO), and adjusted funds from operations (AFFO).
Before I began writing about real estate investing, I was convinced it was the sort of thing I just wasn't cut out for. My idea of real estate investing meant buying houses in disarray and fixing them up at a profit, or buying income properties to rent out and having to play the unwanted role of landlord.
Neither of those options appealed to me in particular. And as someone who's somewhat risk-averse, I never really got excited about the idea of taking on another physical property to own. Also, I prefer true passive income -- the kind you get when you collect interest payments from bonds or dividend payments from stocks.
But then I realized that it's more than possible to invest in real estate without owning actual property. In fact, you may already be a real estate investor without even being the wiser.
Is your portfolio invested in REITs?
Buying homes to flip or rent out is an obvious way to invest in real estate. But if you own shares of REITs, or real estate investment trusts, you can achieve the same goals.
REITs are companies that own and operate different types of properties -- and you may already have some in your portfolio. If so, congratulations -- you're a real estate investor! And if not, you may want to load up on REITs for a couple of key reasons.
First, just as regular stocks have the potential to gain value over time, so do REITs. But what makes REITs unique is that they're required to pay at least 90% of their taxable income to shareholders as dividends. This means that if you buy REITs, you might enjoy more generous dividends than what your other stocks pay you.
REITs can also lend to added diversification in your portfolio. And that's an important thing to have, both when the market is healthy and when it's stuck in a rut.
How to buy and sell REITs
Publicly traded REITs are extremely easy to buy and sell because it's the same process as buying and selling stocks. Just research different REITs, find their tickers, enter that information into your brokerage account, and voilà -- you can add shares to your portfolio pretty seamlessly.
Publicly traded REITs are also a very liquid investment (unlike income properties, which are fairly illiquid). That means you can sell them quickly and easily.
I make a point to keep my portfolio filled with different types of REITs. Not only do I like collecting the dividend income that allows for, but I've also chosen companies I think will lend to steady growth over time.
I definitely don't consider myself a real estate investor in the classic sense. I'm not about to venture into the house-flipping game, and I certainly don't have the patience to be a landlord and deal with tenant issues. But owning REITs makes me a real estate investor in my own right -- and in a manner that aligns better with my comfort zone and doesn't cause me needless work or stress.