Getting started in real estate can be a very daunting task for most Americans. Most Americans will usually never own more than one home at a time. So, how else do you get broad exposure to the booming real estate commodity? This is where REITs come in. REITs are essential to your overall investment strategy and your overall community. Once you learn about REITs, you will realize they own many of the structures around you.
I am starting this series for beginners who are just getting started with the stock market and real estate investing. If you are more advanced, I would recommend reading articles on www.seekingalpha.com and subscribing to Hoya Capital’s newsletter. On Seeking Alpha, I would subscribe to Jussi Askola, who is my favorite REIT writer. These resources will help you continue to grow your knowledge in the REIT sector. Information on REITs is never-ending, which is very exciting. Currently, I am planning 4 more articles in this series, but I can add more as requested.
What are R.E.I.T.s? Real Estate Investment Trusts are companies that pool together capital to invest in real estate. By law, REITs have to pay out a large amount of their profits (roughly 90%) to shareholders in the form of dividends. The type of REITs we will discuss today all trade on the stock market. This means the money you invest is very liquid (easily accessible), it also means these REITs are more volatile because of the nature of the stock market.
Why Real Estate is the IDEAL Investment
Are R.E.I.T.s Safe? REITs should be an integral part of a diversified portfolio and a larger cash flow strategy. I like to think about it like this. If REITs are 25% of my stock market portfolio, which is 50% of my investment portfolio, which is 25% of my cash flow strategy (which includes retirement income, rental income, and business income), then I consider them pretty safe. Most REITs are tied to physical property and their net asset value can be tracked fairly easily. REITs require more research because they are not a household name, like McDonald’s. However, once you start researching, they will become household names to you.
Positives of REITs. REITs are cash cows. Most people buy REITs for income. Large dividend-paying companies have dividend yields between 2-4%. With REITs, you can easily get 4-10% dividend yields.
Also, you can find REITs that pay monthly dividends. This is great for building a stable base of income across your portfolio. For instance, if you invest $200 in a 10% yielding REIT, you would receive roughly $1.67 a month for as long as you hold the REIT.
It is easy to track a REITs net asset value (NAV). The NAV is the value of the REITs’ physical holdings. Since REITs trade on the stock market, they are subject to inherent volatility. This can be a positive if you are a rational investor. You will be able to buy REITs at huge discounts to NAV. This will increase your dividend yield.
How to leverage Real Estate at any age
Think of NAV in terms of the value of your home. Let’s say you live in San Diego, California (my hometown). You know in your heart of hearts that your home is worth $500,000. In good times, your house value is quoted at $750,000. You may think about selling, or you may take out some equity via a home equity loan. But, if the market changes, they may quote your home at $250,000. Would you try to sell at this time?
Well, this happens in the stock market as well. I usually read articles on www.seekingalpha.com that tell me when REITs are trading at huge discounts to NAV. I do my due diligence and make a buying decision. Then I collect my dividends and wait for the price to appreciate again. I did this during the pandemic, to great success. I just didn’t have a ton of money at the time. Now, I am even better positioned to repeat this process during the next downturn.
Negatives of REITs. The biggest negative is that REITs trade on the stock market. Many people cannot handle the stress associated with the stock market. I have a solution for you. Fundrise is a REIT that does not trade on the stock market. Instead of raising money from big corporations and banks, Fundrise gets its money from small-time investors like you and me. I have an article on Fundrise planned during this REIT series.
Again, you can turn the fact that REITs trade on the stock market into a positive, if you have the correct mindset. It is all how you view your investments. If you are a trader (short term investments), I would not buy into REITs. Investors (long-term) will make out very well buying REITs at the correct times.
REITs are subject to interest rate pressure. Because REITs use leverage (read: debt) to increase their profits, interest rates are a key factor in the money they earn. Each REIT type has a different sensitivity to interest rates and market pressures, that is why you need to understand which REIT types you are buying. My next article in this series will explain the different types of REIT sectors. Mortgage REITs are especially sensitive because they are paper REITs, not Equity REITs. This means that mortgage REITs own the loans, while Equity REITs buy the structures. So, mortgage REITs are more akin to a bank.
When interest rates spike downward, people will refinance their loans. This behavior can have a negative effect on mortgage REITs. There are ways to invest wisely in these REITs, just be aware of your investment situation. My favorite REIT of all time is a mortgage REIT called AGNC. More on mortgage REITs at www.REIT.com
REITs are a very broad category that needs to be researched thoroughly. I jumped in without knowing my head from my rear end. During the pandemic, I learned a lot. I usually like to jump in head first, and then learn from there. That is me. I highly recommend investing some time with Hoya Capital. They have everything you need to know about REITs. Subscribe to their newsletter.
This was a basic introduction to REITs. There is still so much to cover. Below I listed the direction I want to take the series over the next couple of months. Please leave feedback and I can adjust my topics as required. Thanks for reading, depending on how much support I receive, is how fast I can complete the series.
- Types of REITs
- Investment Strategies
- Fundrise
- REIT ETF showdown, VNQ vs HOMZ
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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