What is a REIT and Why You Should NOT Waste Your Money Investing In Them | Master Passive Income (2024)

When I first started to invest in real estate I tried everything possible to do it. Flipping, wholesaling, renting, and even investing in REIT's. When I first heard of a REIT, I had no clue what it was. So, I had to ask the question, “What is a REIT” and should I invest in them?

Honestly, after learning what is a REIT and how how I can make so much more money by learning how to invest in real estate myself, I realized that I can make WAY more money doing it myself.

Even though I make so much more money investing in single family rental properties, that type of investing may not be for everyone.

Actually, investing in REIT's can be a good option for people with little time to spend building their own rental property business.

Let's look at what is a REIT and the good and bad about them.

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What is a REIT compared to Traditional Real Estate Investing

What is a REIT (Real Estate Investment Trust)

REIT is a method of investing that is like investing in stock markets, except that the investment is in a company that invests in real estate on behalf of its shareholders.

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You are still investing in realestate, but this investment is made indirectly through a trust operated bymanagers who are skilled and experienced in real estate investing.

If you do not have the kind of money to buy expensive residential or commercial properties, you can invest in a real estate investment trust to earn a good return on your money.

What is Traditional Real Estate Investing

With traditional real estate investing, you start your own business and buy one rental property.

This one rental property will make you money in passive income each month when you place one tenant into the property.

Building a rental property business may sound hard but it is fairly simple. There are some things you need to know like:

  • Know your expenses
  • Know how much you can rent it for
  • Find a property manager
  • Find a good tenant
  • Calculate the numbers to make $250 or more in passive income.

I made a free course for you to get started if you want to with investing in real estate. Get the free course below to help you get started.

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Why I Invest In Real Estate Myself Instead of Investing In REIT's

The biggest reason is that I can make so much more money with the money I invest in single family homes rather than a REIT.

REIT Investing Example:

With a REIT, if you invest $10,000, your dividend (more on that later) may be $300-$500 in one year.

This is depending on the REIT you invest in, the market, other investors, etc.

Single Family Home Rental Example:

With a single family home, if you invest $10,000, your yearly profit could be $3,000 to $3,600.

This is because you buy a home that makes you $250 to $300 a month in passive income. After 12 months, you are able to make $3,000 to $3,600 a year!

PLUS, if you invest in real estate the right way, you will have others do all the work for you while you don't do any work at all.

Investing in yourself is better than REIT's

The 10x profits from a rental property over a REIT is a huge reason to invest in rental properties.

Another great reason is that you are investing in yourself and creating your own business.

Also, there are 6 ways you make money investing in real estate. I wrote all about those six ways here but here is a quick recap:

  • Monthly Passive Income
  • Equity Capture
  • Forced Appreciation
  • Mortgage Buydown
  • Market Appreciation
  • Tax Advantages

One last thing I want to show you is the 16 amazing reasons why you should invest in rental properties. If after this, you are not convinced to invest in rental properties, investing in a REIT may be the best thing for you to invest in. 🙂

What You Need to Know About Investing in REIT's

Hopefully I have shown you that you can do SO MUCH BETTER investing in rental properties than REIT's but let's continue looking at REIT's though.

Even though I love investing in rental properties, not everyone is right to invest in them.

REIT's are a good alternative and does have some good advantages.

Actually, if I were not investing in my own business and just wanted to invest easily in real estate, I would invest in a REIT. In fact, I used to invest in REIT's before I became an actual investor.

So, let's look further at investing in and what is a REIT.

What is a REIT by definition?

REIT is an acronym that stands forReal Estate Investment Trust. A REIT is a corporation that owns and operatesmany properties, including both residential and commercial properties. Theoperations of a REIT are managed by real estate experts.

Commercial properties in the portfolio of a REIT are hotels, offices, apartment buildings, warehouses, and so on.

The income of such a company is dependent upon income-producing properties. Its profit is divided among the members according to their investments in the company.

This isbecause the price of commercial properties is so expensive that hotels, officebuildings, warehouses, shopping complexes, etc. are all usually out of reachfor the average person who wants to invest in real estate.

However, investment in commercialproperties becomes possible for you if you choose the option of REITs. You donot get the same returns this way as if you were investing directly in theproperty itself, but you also face far lower risk.

Many of these REITs are listed on the stock market and their shares are traded just like other publicly listed companies.

The biggest advantage of a REIT is that it makes it possible for a common individual to invest in real estate by buying the shares of the company.

Any individual can become the ownerof a part of real estate and earn dividends out of income produced by this realestate.

Whatis a REIT dividend?

The biggest attraction of investmentin REITs is dividends.By law, REITs need to distribute 90% of theirearnings among their shareholders. These payouts are in the form of dividends.

Corporation tax is not applicable onREITs just because of this requirement of distribution of almost 90% ofearnings. The earnings of REITs are mostly in the form of rental income andcapital gains.

If you invest in a REIT, you areeligible to get dividends from the company in the proportion of shares that youhold in your name.

It is easy to buy shares of any REITthat is listed on the market. You can trade in the shares of a REIT just likeany other company listed on the market.

The amount of money you receive inthe form of dividends depends upon the income of the company and the number ofshares you own in the company.

Howwill the REIT dividend grow your investment?

REITs can give higher and morefrequent dividends to their shareholders as they are not subject to many of theFederal taxes that apply to other companies.

This is why more and more investorsare drawn to real estate investment through REITs.

In addition to high yield, REITsalso offer the advantage of capital appreciation to investors. This is possiblethrough reinvestment of dividends received from REITs.

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These plans are called DRIPS(dividend reinvestment plans). If you opt for DRIPS, your dividends areautomatically reinvested in the shares of the REIT.

No sales fee is charged by the REITand the investor enjoys the higher growth yield of these reinvestment plans.

Whyshould you invest in REIT for an investment?

There are many reasons why you needto invest in REITs.

  • First, you get a chance to invest in real estate with a small amount of money. You can reap dividends with the expertise of the corporation already experienced in commercial real estate investment.
  • You can diversify your portfolio by investing in REITs.
  • You can experience security and reliability with REIT investment.
  • REIT investment is high-yield in comparison to investment in the stock market.
  • Buying and selling shares of REITs is as easy as buying shares of other companies listed on the market.
  • REIT investments also allow for long term capital appreciation.
  • REITs have a very low barrier to entry. You do not need large amount of money to start investing in REIT.
  • There is no corporate tax on the REIT as it pays out 90% of its earnings in the form of dividends to its shareholders
  • The common investor gets access to commercial real estate so expensive that it would be impossible for him to buy otherwise.
  • Selling property to get money can be a time-consuming job, but if you invest in REIT you can quickly get your investment back whenever you wish by selling your shares

Investing in REIT is a good thingfor an investor as it not only lends diversity to his portfolio but alsoincreases the total yield from the portfolio. Also, REIT investments arecomparatively safe and reliable.

Isa REIT a good investment?

Investors are constantly seekinginvestment vehicles with high yields, and REITs have emerged as extremelypopular tools of investment.

These real estate investment trustsadd a certain level of stability and reliability to the portfolio of anyinvestor along with high yield.

The shares of a REIT are publiclytraded just like the shares of any other company listed on the stock market.

REIT is not charged the corporatetax that other corporations must pay. This is one of the reasons why yieldsfrom a REIT are higher than the yields of other companies.

No matter how one looks at REITinvestment, it turns out to be good one:

  • High return on investment
  • Less risk than traditional real estateinvesting
  • Reliability of dividends
  • Liquidity being that you can sellthe shares at any time like all other stocks
  • It also offers opportunities forlong term capital appreciation in addition to high yields.

Canyou lose money in a REIT?

Investing in a REIT is just likeother types of investments. The investor is exposed to the risks of marketconditions.

Also, the fact that the shares of aREIT are traded on the stock market means their prices can go up and down likestocks of other companies.

This means you can lose money in aREIT just like investment in the stocks of any other company.

This is why it is important toconsult a financial advisor who has knowledge of these REITs before parkingyour money in a REIT.

The thing to note here is that theprice per share of the REIT may go up or down, but the dividend remainsunaffected.

For example, if you have purchased100 shares of a REIT for $20 per share and the price goes down to $15 pershare, you continue to get the same dividend per share even though the totalamount you get goes down.

Whynot to invest in REITs?

With so many advantages, it seemsthat REITs are one of the best investment vehicles around. However, like anyother high-yield investment vehicle, REITs can be risky for the investor attimes.

If you are investing for a shorttime period, REITs are not for you. REITs are best suited for long terminvestments.

Dividends from a REIT can beadversely impacted by fluctuations in interest rates.

Therefore, you should not becomeworried with the performance of your REIT investment over a short period oftime.

While REITs have traditionallyprovided higher yields to investors, they are also risky in many aspects.

As they are linked to the prices ofreal estate, many investors prefer to move out of REITs whenever real estate pricesgo down or become stagnant.

Shares of REITs become weak wheneverthere is any weakness in the real estate prices.

If the REIT you have invested in isnot traded on the stock market, liquidity becomes a big problem for you. Youcannot sell out your shares readily on the open market if the prices of yourshares have fallen.

The biggest drawback of REITinvestment is that you have no direct control over your investment.

You are dependent upon the skills and experience of the managers operating the REIT. If these administrators are incompetent or charge very high fees, there is not much that you can do.

As a seasoned real estate investor with years of hands-on experience and a deep understanding of the industry, I can provide valuable insights into the concepts discussed in the article. My extensive background in real estate allows me to break down the key points and offer a comprehensive analysis.

Real Estate Investment Trust (REIT): A REIT, or Real Estate Investment Trust, is a method of investing that resembles investing in stock markets. In this approach, individuals invest in a company that, in turn, invests in real estate on behalf of its shareholders. The investment is indirect, managed through a trust operated by skilled and experienced real estate professionals. This structure allows individuals with limited funds to gain exposure to real estate without the need to directly purchase expensive properties.

Traditional Real Estate Investing: Contrasted with REITs, traditional real estate investing involves individuals starting their own business and acquiring rental properties. This approach requires more active involvement, including managing properties, finding tenants, and handling various aspects of property ownership. The goal is to generate passive income through rental payments from tenants.

Reasons to Invest in Rental Properties Over REITs: The article emphasizes the advantages of investing in rental properties over REITs, citing higher potential profits. The author shares a comparison: with a REIT, a $10,000 investment may yield $300-$500 in dividends, while a $10,000 investment in a single-family home could result in yearly profits of $3,000 to $3,600. The author argues that investing in rental properties allows for 10x profits and provides the opportunity to build a personal business.

Six Ways to Make Money Investing in Real Estate: The article mentions six ways to make money through real estate investing:

  1. Monthly Passive Income
  2. Equity Capture
  3. Forced Appreciation
  4. Mortgage Buydown
  5. Market Appreciation
  6. Tax Advantages

Advantages of REIT Investments: The article also acknowledges the advantages of REIT investments, such as:

  1. Access to real estate with a small investment.
  2. Diversification of investment portfolio.
  3. Security and reliability in REIT investment.
  4. High-yield compared to the stock market.
  5. Ease of buying and selling REIT shares.
  6. Long-term capital appreciation.
  7. Low barrier to entry for investors.
  8. No corporate tax on REITs due to the requirement to distribute 90% of earnings as dividends.

Potential Risks and Considerations with REITs: The article highlights potential risks associated with REITs, including:

  1. Exposure to market conditions and risks.
  2. Impact of interest rate fluctuations on dividends.
  3. Liquidity issues if the REIT is not traded on the stock market.
  4. Lack of direct control over the investment, relying on REIT managers.

In conclusion, the article provides a comprehensive overview of REITs and traditional real estate investing, offering insights into the pros and cons of each approach. The author leans towards advocating for personal real estate investing, emphasizing the potential for higher profits and control over the investment.

What is a REIT and Why You Should NOT Waste Your Money Investing In Them | Master Passive Income (2024)
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