Real estate has always been an excellent path for growing wealth, but until recent decades there were few good options for smaller investors. Amateurs had to either develop their own skills, turning property investing into a second job, or entrust their money to others who often put their own interests first. Today, however, real estate investment trusts (REITs) have enabled everyday people to quickly, safely, and affordably invest in the most significant and desirable buildings and land projects around the country and even the world! Over the year, REITs’ investment returns have averaged about 12%, making them worthy of every investor’s attention.
Billionaire Sam Zell as your partner
REITs are companies, formed and managed by professionals, that purchase and manage apartments, shopping centers, office buildings, and every other form of real estate. These companies are divided into shares which can be purchased for a few dollars each, entitling their owners to a portion of the profits generated by the real estate owned by the REIT.
For example, for less than $100 you can buy a share of Equity Residential, which owns over 300 residential properties with 80,000 apartments in major US cities. Founded and managed by billionaire Sam Zell, investors in EQR have earned over 12% annually since 1994, turning a $10,000 investment into $194,000 by 2019! Rather than run around trying to find a deal or a worthy manager, you can invest your money in EQR and leave the headaches to your partner, Mr. Zell, and his team.
Diversified, liquid, and transparent
Another option is to invest in iconic office buildings through Boston Properties’ REIT (11.96% since 1996), significant industrial properties with Prologis’s REIT (10.02% since 1998), or to simply use a mutual fund that buys small pieces of all the dozens of REITs (10.19% since 1996). REIT investors benefit from knowing exactly where their money is and having access to it if need be.
Like all publicly traded companies, REITs are obligated to publicize audited financial records and follow the investment plans set out in annual reports. Buying and selling REIT shares are done instantaneously through any stock brokerage platform like Fidelity, Schwab, and Vanguard, making REIT investing extremely convenient. The ultimate in simplicity, transparency, and diversification, REITs should be the first choice for those who don’t have the interest or ability to invest in real estate personally.
Beware of REITs’ taxes and volatility
There are some caveats to REIT investing, though. First, REITs’ dividends are taxed at ordinary tax rates (unlike stocks’), and with REITs, depreciation, a tax deduction that significantly offsets taxable income for those who own properties directly, does not apply. Therefore, it’s best to buy REITs within tax-sheltered retirement and education accounts such as IRAs, 401(k)s, and 529s.
Also, market cycles can cause the price of REIT shares to zoom up or down significantly, well beyond the actual value of the buildings owned by the companies. While all (comparably leveraged) real estate experience similar price swings from time to time, REITs’ very visible share pricing makes volatility more obvious and harder to stomach. Long-term investors should ignore these fluctuations and focus on the value of the REIT’s income-producing assets which remain secure regardless of the emotional behaviors of the market. Also, note that everything discussed here is regarding publicly traded REITs, not the private or non-traded REITs heavily marketed by brokers and online solicitations.
Simplicity often wins
Considering the simplicity and high returns available to REIT investors, it’s puzzling why nonprofessionals don’t use them as their sole method of property investing. While some are merely unaware of their existence, there is also a human tendency to seek out the complicated and exclusive while belittling the easy and accessible.
A good analogy for this is someone who insists on waiting for a taxi to get across Manhattan instead of jumping on the subway. While in theory, the pricier car service should be a better option, in reality, the humble subway will probably get there sooner, often with a smoother ride as well. Similarly, if you don’t mind getting jostled a bit during rush hour, you can get where you have to go through simple but powerful REIT investing.