I first heard about REITs in 2010, when I started to get into dividend growth investing on the stock market. REIT stands for Real Estate Investment Trusts, and are highly regulated companies that invest in real estate and get profits from it. In this article, I will tell you why I love REITs as a way to invest in property.
REITs are companies that are publicly traded on stock exchanges, just as other stocks. The main difference, apart from the fact that they invest mainly in real estate, is that they need to give at least 90% of their taxable income back to shareholders as dividends. This leads to higher dividend yields compared to most stocks, in the range of 5 to 10% annually, which is basically about the same yield you would get owning a piece of real estate yourself.
Note that in this article, I will mainly speak about REITs as they are defined in the US, but this could perfectly apply to similar companies in Europe or other countries. For example, here in France such companies are called SICAVs and operate on similar basis. Let’s dive in!
The first thing that I like about REITs is that they allow you to invest in property with a very limited capital. In my article where I say why I invest in crowdfunded real estate, I said that you can invest in property with a starting capital of about $1000. Well, with a REIT, it’s even lower. A share of the Realty Income Corporation was trading at around $46 at the time this article was written. Usually, most REITs have their shares for sell at under $100.
This means that you can get into the game with a really small capital, even if you have less than $1000. Compare that with the downpayment of a typical property investment. And you can invest without having to ask permission to anyone: no need to get a loan at the bank to invest in a REIT.
Also, because the shares in REITs are traded on stock exchanges, it means that your investment is liquid: you can get out of it at any time. This is really useful in case something bad happens in your life. Try to do that with a property you own: you can of course sell it, but the process of selling takes a lot of time. With an investment in REITs, your capital is always available within a click of a button.
When I bought my first piece of property in Germany, I was really happy. I put nearly all my money as a downpayment, and bought this one-bedroom flat with the help of a loan. It was nice, but it was a terrible choice to diversify my portfolio and to reduce my overall investment risk. One piece of residential real estate in Germany: that was my property portfolio.
Because owning a share in a REIT is quite cheap, it’s much easier to diversify. For example, with REITs it is very easy to spread your portfolio across your country and even overseas. I for example always try to balance my REITs portfolio between several locations around the globe, like the US, Europe, and Asia.
Also, you are not limited to residential investments or small investments when you are investing through REITs. Indeed, if you are starting out in the field of property investment, you are not going to buy a 10 apartments building as your first investment. You just don’t have the capital. You will usually focus on smaller investments like condos or small houses.
With REITs, there are no limits: they usually own large pieces of real estate, and it is also easy to diversify in different sectors than just residential buy-to-let properties. For example, I own shares in REITs that are specialised in the construction and maintenance of healthcare related real estate, like hospitals and elderly homes.
The thing that I like with REITs, just like crowdfunded real estate, is that it’s a completely hands-off investment. No more problems with tenants or with fixing broken toilets: a REIT is a company that takes care of all the properties they own. As an investor, the only thing you have to do is to select the right REITs for your portfolio, receive your dividends, and reinvest your earnings if you want to.
I wanted to keep the best part for last, which is also the most controversial. Yes, you can achieve great returns with REITs. Most of the REITs I am invested in yield around 5 % annually. As a comparison, the flat I own in Germany yields at 6.5 %. For me, the smaller yield of REITs is a small price to pay compared to all the hassle that comes with owning and managing your own property.
Some people also say that the problem with REITs is also that dividends are only paid once a year, whereas rents are collected every month. Well, that’s not exactly true. Many REITs pay quarterly dividends, and some even pays dividends every month, like the Realty Income Corporation REIT that I mentioned before.
What about you, do you also invest in REITs for your property portfolio? Or do you prefer other type of real estate investments? Please share below in the comments!