5 Reasons To Buy REITs Now
If you’ve never heard of Real Estate Investment Trusts or REITs, you’re missing out! REITs are a great opportunity to invest in real estate and the stock market.
Amon and I have had great success with REITS over the past ten years or more, averaging 15% returns. So I want to share our enthusiasm for REITs with you, so you can see some of the same success.
What Are REITs, Exactly?
There’s no point in raving about these things if you don’t know what they are, so let’s define what REITs are exactly. A REIT is a company just like Ford or General Motors, but REITs invest in real estate for profit just as those companies build cars for profit. These profits are what investors like you and me benefit from!
Anyone can buy a share in a REIT, and they allow you to invest in portfolios of real estate assets in the same way you would any other industry - through the purchase of individual company stock, mutual fund, or an exchange-traded fund.
Stockholders of a REIT earn a share of the income produced through real estate investment without actually having to buy, manage, or finance a property. That’s part of why REITs are so amazing! You get the benefits of owning a property, without actually having to own one.
Another great benefit of REITs is that they specialize in specific real estate sectors, making them more effective. For example, we own a REIT that specializes in healthcare facilities!
How REITs Work, and How You Can Benefit
REITs have a fantastically simple business model. They lease spaces and collect rent on each property they own, then redistribute that rent as dividends to shareholders. These dividends are what make REITs so special.
That’s because, by law, REITs are required to distribute 90% of the profits they make from their income in the form of dividends. Consider MPW, the medical properties trust that we own shares in, that pays 5-6% in dividends. Or even VGSLX, a REITs index fund, which pays over 4%.
Now, let’s take a look at the five reasons why you should start buying REITs today!
1. REITs Do Better Than Rental Real Estate
Yes, it’s true. And Amon and I LOVE investing in rental real estate. But we compared the real estate that we rent long-term to the REITs that we’ve owned long-term, and the results are hard to deny.
So long-term rental properties can average 8-9% in returns each year when doing well. REITs, on the other hand, average at 15% in returns. And compared to the amount of time and effort put into maintaining a rental property, that’s an easy 15%.
2. REITs Index Funds Are Doing Better
Compared to the S&P and the total stock market funds, REIT index funds are just performing better. It may come as a surprise, but it’s true. For example, at one point over a six-month period, the Vanguard ETF VNQ returned 22.52%, compared to VTI, our favorite total stock market ETF that has only returned 19.99% between 1978 and 2016.
And REITs average close to 12.8% while the S&P 500 generates 11.64%. The difference may not be huge, but those extra points add up over time. They also pay a higher dividend, just look at the VTI and VNQ! VNQ pays almost 4% in dividends while VTI only pays 1.5-2%.
3. You Can Be a Real Estate Tycoon
This is what we love most about REITs. With these trusts, you can invest in virtually any kind of real estate - office buildings, strip malls, healthcare facilities, and all sorts of things you could likely never buy on your own. Though we love to invest in condos and townhouses and plan to invest in land one day, REITs give you access to everything. You can become a veritable real estate mogul.
4. Instant Real Estate Diversification
REITs invest in all kinds of real estate all around the world, and obviously, by owning a REIT you get to own a piece of that diversification. When you buy real estate on your own, you’re putting all of your eggs into one small basket. But with a REIT, your basket is much wider.
Diversification that comes with a REIT can protect you from the ups and downs of the market that you may be investing in. That’s another thing that really makes REITs special.
5. Makes Real Estate Investing Simple, Easy and Cheap
People are constantly asking us “how do I get started investing in real estate?” Well for us, REITs are the answer. You can buy a REIT for just $10, and suddenly you’re investing in real estate!
But while you do this you’re also gaining the knowledge required to start investing in real estate further by purchasing your own individual properties. One of the most important parts of investing is gaining that financial literacy so you can start using it in real life.
These are the five reasons I think that REITs make great investments, and I felt like I needed to share them because REITs have been an excellent addition to our portfolio. If you’re considering buying your own after reading this, make sure to do your research first! There are over 200 REITs that you could invest in.
You can even invest in an index fund just like you invest in the total stock market. Personally, we like the Vanguard VGSLX that invests in over 190 REITs, and pays a dividend of 4%. There’s also an ETF equivalent called VNQ that we’re partial to.
But whatever you choose, make sure you choose a REIT of some kind. It’s a great way to make money, save money, and get one step closer to financial independence.