REITs: Invest In Real Estate Without a Downpayment

With real estate being on the rise for the past couple of years, many people wonder how they can get started in real estate investing without putting a large downpayment on a house.

Today, we will discover how we can diversify our investment portfolio in real estate through what is known as a REIT.

What Is a REIT?

REIT stands for Real Estate Investment Trust. Simply, it is a company that owns and operates a portfolio of real estate. It allows you, as an investor, to own any type of property without physically owning the property.

These companies distribute 90% of their pretax income back to the shareholders in the form of dividends. What is really nice is that most REITs have high dividends, often upwards of 5%.

I like REITs because they make it very easy to get started investing with them. However, they are not for everyone. Let’s go over the pros and cons of investing in REITs.

Benefits of a REIT

The main benefit of owning a REIT is the amount of money you need to get started. You can get started with whatever amount you like. You are not required to give a 5-20% down payment as if you were to buy a home.

You also do not need much experience to make a profit from owning a REIT. It is much like owning a stock that pays you dividends. Most REITs have a high dividend yield, so you can find something that pays you a yield of 5% or higher, monthly.

Yes, there are many REITs that distribute monthly dividends, much like if you were to collect rent from a traditional property.

The next important topic to discuss is diversification. See, you can pretty much buy whatever type of real estate you want through REITs. If you want to invest in commercial or healthcare real estate, you simply find a company that operates within that sector and start investing in it.

It is much harder to buy a physical commercial real estate property because it requires much more money in comparison to a traditional home. REITs allow you to tap into this type of market from your phone. All you need to do is simply buy shares on your investing app of choice.

My absolute favorite part of owning a REIT is the fact that I don't have to deal with the tenants. As a homeowner, I have to struggle with issues like leaks, tenant problems, noise, cleaning the snow, doing background checks, nagging my tenant for rent, and much more. I appreciate that I don't have to worry about that with REITs.

Another thing I appreciate about REITs is their liquidity. I don't have to wait on the bank, find a buyer, or wait months to get through the process. I can buy or sell it at any time as long as the stock market is open.

You can get started with apps like M1 Finance, Robinhood, and Charles Schwab.

Risks of a REIT

One risk that comes with owning REITs is depending on the type of REIT you invest in. Say, you buy a company that operates shopping malls. This type of REIT would be more affected during recessions and economic declines. For instance, during the pandemic, REITs that operated malls and hotels suffered more than those that operated healthcare facilities.

Also, there are no tax advantages when owning a REIT like you have when owning a physical property. Also, REIT dividends are not considered "qualified dividends," which means that they will be taxed at your ordinary income rate.

In addition, there is also limited growth that comes with owning a REIT. Since REITs are required to distribute 90% of their pre-tax income as dividends back to their shareholders, they are not going to appreciate in the long term as much as physical properties.

How to Choose a REIT

When choosing a REIT, it is important to understand the types of properties in operation and how they perform during economic declines. You should take a look at their stock history and see how sensitive they were to the recessions of the past.

Take a look at their dividend growth over the past years and whether they cut their dividends throughout their history. Personally, it is a red flag for me when a company cuts their dividends and tells me I need to research them more before I invest in them.

You can also own a REIT ETF, which invests in many different types of REITs. This increases your diversification and will reduce your risk of just owning one type of REIT.

Bottom Line

Getting started with REITs is fairly simple. You can get started with apps like M1 Finance, Robinhood, and Charles Schwab as if you were buying regular stock. You can also get an ETF to broaden your exposure to REITs and reduce risk.

The benefits of REITs outweigh the risk of investing in them. They have a very low entry barrier, which means anyone can get started trading with little effort and experience. Additionally, owning a REIT doesn't come with the hassles of owning a physical property but still provides you with monthly rent through dividend distributions.