7 advantages REITs have over owning investment properties

The advantages of REITs greatly outweigh those of owning investment properties.

Own an investment property, collect rent on it, let your equity stake appreciate over time, be someone’s landlord (‘landlord’ has a royal ring to it, doesn’t it?) – it all sounds great – on paper. 

But owning property comes with a lot of responsibility, hidden costs, and fine print catch-22s that most beginner landlords often don’t consider at the outset. 

These pitfalls can be expensive by many measures including time, money, and stress.

Enter REIT investing, where you get all the upside of real estate investing (and then some) while foregoing the drawbacks. 

Here are seven reasons REIT investing is a better alternative than buying investment properties. 

REIT Advantage 1: No mortgage required

Most of us don’t have a few hundred grand to drop on investment properties. That means in order to finance one, we need to get a mortgage. 

Mortgages aren’t cheap. 

A $350,000, 30-year mortgage with a 3% interest rate (doesn’t sound so bad, right?) will cost you over $180,000 in interest over the lifetime of the loan. That’s more than 30% of your capital – or ten years’ worth of mortgage payments – evaporating into thin air.

pizzanomics financing an investment rental property

By contrast, every dollar you put into a REIT boosts your equity stake and dividend payout. 

REITs sometimes finance properties when they acquire them, but usually only if it’s strategic in optimizing returns. 

Oftentimes, they have enough capital to buy the property outright, saving hundreds of thousands in mortgage interest rate costs. 

As a REIT investor, those savings get passed right on back to you. 

REIT Advantage 2: Shorter path to profitability

It might seem like as long as you have a tenant whose monthly rent is higher than your mortgage payment, you’re in the green. 

That’s only partially true. 

The rent on your investment property needs to not only cover your mortgage payment, but also costs of home insurance, HOA fees, property taxes, possibly water and trash, maintenance (which can be an unwelcome dark horse), and property management fees if you’re not managing the property yourself. 

But, maybe you’re a P&L expert who can successfully calibrate your rental rate just right. Every month, you effectively cover both the mortgage payment, and all the side expenses, without interruption.

In these ideal circumstances, your first truly ‘in the black’ profit will be when your mortgage is paid off. 

The average mortgage term in the U.S. is 30 years – 15 if you’re on the fast track. If you start today, and everything goes swimmingly, 2051 will be a great year. 

If things don’t go perfectly for 30 years straight, maybe 2055 will be a great year? Time will tell. 

As a wise woman once said: “Ain’t nobody got time for that.”

Say you were considering buying an investment property for $350,000. You’d need $70,000 for the down payment, plus a few thousand for other closing costs. You are now the proud owner of a mortgage, and just 29 years and 364 days away from profitability. 

Alternatively, you could invest that capital into a REIT like HappyNest and at current rates, make approximately $1,575 return per quarter, starting about three months from now.  That’s 29 years and 275 days sooner than buying an investment property.

REIT Advantage 3: Passive income

If a landlord receives rent payment but immediately hands it over to the bank, was the payment ever really income at all?

It’s a head-scratcher. Luckily, you can avoid this conundrum by investing in REITs instead.

Most REITs pay out dividends monthly or quarterly. Instead of that $350,000 property you were considering, you could instead invest the would-be downpayment and start collecting a $1,125 dividend every quarter. 

Best of all, no need to turn right around and give it to your mortgage holder – because there isn’t one. That money is free to tuck away for retirement or go to Vegas and put it all on red at the roulette table. 

Alternatively, you can reinvest that dividend and witness the wealth-building

magic of what Albert Einstein once called the ‘8th Wonder of the World’: Compound interest. 

einstein

You see, if you practice delayed gratification, you could add that $1,100+ to your nest egg so that your next quarterly dividend payment would be approximately $1,200. Keep that going for a couple years and you’ll get yourself a nice little egg going.

Personal finances are dynamic – your needs can change over time. 

With a financed, private investment property, your mortgage needs to get paid whether or not your primary residence needs a new roof. 

But you can elect to have REIT dividends deposited directly into your bank account to help cover unexpected expenses, then go back to reinvesting as your financial situation stabilizes. 

It’s passive income at its finest. 

REIT Advantage #4: Liquidity

There comes a time in every investor’s journey in which they’ve reached their financial goals (or need the money) and are ready to cash out.

As the owner of a private investment property, there are some hoops to jump through to make that happen. 

water-droplet-fast-fresh

The real estate market conditions are a variable – no one wants to sell in a downturn. You’ll probably have to shell out a percentage to a realtor, possibly fund buyer contingencies, and pay for a lawyer to review documentation (who aren’t exactly known for their thrifty rates). 

With a REIT investment, that’s not the case. If you’re invested in a public REIT, you could have the funds in your account in a matter of days. (But consider the pros and cons of investing in a publicly-traded REIT in current market conditions). 

Withdrawals from a private REIT usually take longer compared to publicly traded REITs and generally require a written request. 

Still – no realtors, lawyers, or contingencies required, all of which eat into your profits. 

REIT Advantage 5: Access to better resources

How does a Sunday morning call about a broken toilet sound? You shelled out $150 for it last week, but the guy you hired didn’t do the job right and now he’s not answering. You’re going to have to hire someone else. 

Your tenant is laid off from their job and has to break the lease four months earlier than expected. Can you go a few months without their rent? Do you have the time to find a new tenant? 

Someone slipped and fell on your property. They’re suing you. Hopefully, the attorney you paid for out of pocket can get the settlement down to below your insurance policy’s liability limits. 

If the above scenarios sound like something you’d enjoy, then private ownership of real estate investment property is for you. Or you could outsource these responsibilities to someone else – but of course, it’ll cost you. 

Any of the above scenarios could fall onto your plate, and more often than not, will do so unexpectedly.

If that doesn’t sound like a good time, you might be a ‘hands-off landlord. And REITs are a hands-off landlord’s dream come true. 

That’s because REITs allocate a portion of their funds to handling these situations.

Additionally, because of their scale, they often have access to better contractors, lawyers, realtors, accountants, and property management companies. Tenants won’t even know your name, let alone phone numbers – every hands-off landlord’s dream come true. 

REIT Advantage #6: Access to otherwise out-of-reach investment properties

In addition to saving you time, REITs provide the opportunity to invest in properties that are completely out of reach for the 99.9%. That includes apartment buildings, commercial real estate, and industrial properties. 

These kinds of properties often have a higher return on capital than your garden variety rental property. But the cost of entry is prohibitive to most individual investors. 

Because REITs pool capital from many investors, they are able to add these investment jewels to their portfolios. Shareholders get to reap the benefits of high return on investment properties that would have been out of reach. 

REIT Advantage #7: Invest as much – or as little – as you want

In addition to the responsibilities and liabilities that come with being a landlord, buying an investment property privately is a huge financial commitment. 

Whether buying the property with cash or by financing it, buyers commit to the property’s sales price – and then some. 

REITs offer investors flexibility in terms of how much of their capital they want to commit to investing. HappyNest, for example, lets investors get started for as little as $10. That’s less intimidating than committing to hundreds of thousands, if not millions of dollars. 

Investors can add one-time boosts to their nest eggs, or skip adding to their principles if financial challenges come up. Mortgages and tenants aren’t quite so flexible. 

That makes REITs an attractive investment for smaller-scale investors who may have some disposable income to invest, but aren’t trying to make huge financial commitments. 

Investing in the right REIT

For all the time, money, and commitment REIT investing saves, return on investment is a direct function of the performance of the properties in its portfolio and its management. 

Don’t skip your due diligence: Check out the REITs portfolio properties, lease terms, and tenants, and consider their long-term prospects. 

HappyNest, for example, has two commercial properties and tenants with 8- to 10-year commitments. That means rental income is unlikely to be interrupted.

Even if the tenants break the lease early, there would be an advance notice to find a new tenant and avoid income interruption.

The good news is, once you find the right REIT, growing your nest egg becomes fairly hands-off. 

All the glory, none of the work. 

Everything You Need to Know About Investing in REITs

Looking to hedge your yolos with some investments that would make the likes of Warren Buffett and Charlie Munger proud?

We could all use a nice anchor in our portfolio to hedge against volatility.

REITs have consistently ranked among the highest return investments over time, which is why they have been an investor favorite for decades.

Real estate is a historically high-performing investment

4-of-5-wealthy-from-real-estate---buildings

In fact, over the last 30 years across ten different investment classes, REITs have taken the

#1 spot for highest returns eight times – more than any other asset class. For those years that they didn’t snag the #1 spot, they ranked second or third an additional six times.

This year proved to be a rough one for REITs, closing out at a net loss. But smart money knows that a down year can also be a prime entry point. After all, the goal is to buy low, sell high.

For the capitalist who sees the opportunity where others see obstacles, here’s the 360 on all things REIT.

What is a REIT?

REIT is an acronym for Real Estate Investment Trust.

In a nutshell, they are companies that pool investor capital to invest in real estate or real estate products. The gains on these investments are in turn distributed among shareholders.

REITs were defined and passed by Congress in 1960 under the Cigar Excise Tax Extension.

The idea was to give average Americans – who might not have the means to buy more than one property – the opportunity to take part in and enjoy the fairly consistent gains from real estate investments.

The act outlined requirements to qualify as a REIT under law. REITs are incentivized to meet these conditions through tax advantages. The big fish reward is that the company does not have to pay corporate taxes if they meet REIT qualifications.

REIT Qualifications

No corporation wants to pass up tax breaks. They’d rather hit these key numbers than rendezvous with the IRS come springtime:

75%

Percent of total assets invested in real estate, cash or U.S. treasuries. Also the percent requirement of revenue generated from real estate-related income such as mortgage interest rates, rent on property, or profit on real estate sales

90%

Amount of taxable income that is paid out to shareholders – a nice perk for investors, courtesy of Uncle Sam. HappyNest intends to pay out 100% of its net income to shareholders.

50%

The maximum amount of shares that can be held by 5 people or less. Coupled with this requirement is that within the first year of an REITs formation, it must have at least 100 investors in the pool.

3 Trillion

Estimated total value of assets currently held by REITs.

The Benefits Of Investing In REITs

1. Regular returns

Unlike many investments, investing in REITs typically produces regular income in the form of dividends generated from rent or mortgage interest payments.

2. Investing in REITs is accessible to the average person

While it would be great to be in a financial position to buy numerous properties and collect rent monthly, for most people, that’s simply not financially feasible.

REITs offer the ability to participate in real estate investing without having hundreds of thousands of dollars at the ready. With real estate investment apps like HappyNest, for example, investors can buy in with as little as $10.

3. Liquidity

Compared to traditional real estate investment property, buying into and selling out of most REITs is easier and more streamlined and requires a lot less paperwork.

4. Hands-free management

Ask any landlord and they’ll tell you – managing properties is a lot of work. Between filling vacancies, managing tenant requests and complaints, and building maintenance, a lot of time and money can go into the administrative side of real estate.

REITs handle the operational side of real estate investments, so investors can skip the 3 a.m. calls about plumbing issue emergencies.

REIT Taxonomy

Although it may seem difficult to understand all there is to know about investing in REITs, let’s start with the basic building blocks.

Remember in biology class when your teacher covered taxonomy trees? You know, kingdom, phylum, class, order, family, genus, species, etc.?

No? Okay, well, pay attention this time – there’s money on the line.

There are several categories…of categories…of REITs. Very meta, we know.

To make things a bit more digestible, it might help to start with a visualization, then get into the nitty-gritty.

If REITs were a taxonomy hierarchy, they’d look something like this:

REIT Taxonomy

Every REIT has a ‘class,’ ‘order,’ and ‘family’ component.

For example: American Tower Corp is a publicly-traded (class), equity-based (order) REIT that primarily manages telecommunication infrastructure sites (family) around the world.

 

Breaking Down The REIT Taxonomy Hierarchy

Class: Investment acquisition strategy

REITs can be categorized by how they accrue capital for different forms of real estate investing.

They fall into three main categories: Publicly traded, public non-traded, and private.

Publicly traded

Publicly traded REITs trade on stock exchanges like the NYSE. Anyone can buy a slice of a real estate portfolio whenever they want.

Pros Cons
  • High degree of transparency
  • Registered with the SEC
  • Ability to generate a high amount of investment capital quickly
  • Easy to buy and sell (highly liquid)
  • Able to be grouped into ETFs. This means the value of the REIT’s share can be affected by the performance of other REITs and sectors as opposed to solely on the performance of the underlying portfolio.E.g.: If a REIT has a strong year but is grouped with low-performing REITs in ETFs, the REIT’s performance will be adversely impacted.

Public, non-traded

An REIT can be public without being traded on a stock exchange like the NYSE.

HappyNest falls into this category. Though anyone can buy shares of our portfolio of properties, the shares are not listed on the NYSE or anywhere else. We see this as an advantage – and 2020’s bottom lines back us up.

This year, the value of the properties in our portfolio appreciated. But not every sector of the real estate market was quite so lucky.

Had our REIT been publicly traded on exchanges, it’s likely it would have been grouped into other REIT ETFs. Because of this grouping, our returns would have been smaller. It’s the stock market equivalent of “guilty by association.”

Instead, our performance is tied directly to and only influenced by the appreciation of the properties in our portfolio, all of which gained this year.

Pros Cons
  • Registered with the SEC
  • Performance of investment tied to underlying asset value alone – insulated from swings in the market at large
  • Ability to quickly raise capital from investors since anyone can buy in
  • Not bought and sold as quickly (less liquid)
  • Less transparent, harder to tell share value
  • Fees
    *(HappyNest does not charge for broker commission of platform fees)
  • Information provided to the SEC may not be independently verified

Private REITs

Private REITs are not listed on exchanges and not offered to the public. As the name implies – they aren’t open to everyone.

Private REITs are not required to register with nor report to the SEC. More often than not, they are only offered to “accredited” investors, otherwise known as very wealthy people that can take the kinds of financial gambles and hits that would put the rest of us on the streets.

Though private REITs have produced higher returns than publicly traded ones, they come with significant risk. Without an SEC registration, there is little to no oversight on their performance and operations. That makes these kinds of REITs particularly susceptible to fraud.

Management fees can be high and unsubstantiated. Investors must put their full trust into the board of trustees.

Pros Cons
  • Potentially higher returns compared to traded REITs
  • Partially insulated from stock market fluctuations
  • Lack of transparency
  • Must be “accredited” investor
    *net worth of $1 million, not including primary residence or income of $200K+
  • Not registered with the SEC
  • High management fees
  • Can require long holding periods (low liquidity)

Class: Type Of Asset Managed

The ‘class,’ (in our REIT taxonomy hierarchy) is the type of real estate assets managed by that REIT. These primarily fall into two categories:

  • Equity

    An equity ‘class’ REIT owns real estate investment properties. The REIT manages, buys and sells, or collects rent from those properties.

    They generate income and profits via market appreciation of their assets. That could include things like rent payments from properties they own outright or a rent payment that exceeds their own mortgage payment on that property.

    For example: An REIT buys a property for $100,000. Their mortgage payment is $1,500 a month. They are able to rent it out for $2,000 a month. That $500, minus overhead expenses, is profit for the REIT – 90% of which must be paid back to shareholders by law.

  • Mortgage-based

    Mortgage-based REITs provide capital to borrowers much like a bank does. They generated returns via interest paid by the borrower during repayment.

Unlike the ‘order’ (investment acquisition strategy) which is either/or, asset types can be diversified within an REIT.

Two Harbors Investment Corp, for example, engages in both mortgage-backed securities as well as owns a portfolio of properties. Its income is generated by a combination of rent, asset appreciation, and interest paid on mortgages it holds.

Family: Real Estate Sectors

Lastly, within the real estate market, there are sectors.

Examples of real estate sectors include:

  • Residential
  • Commercial
  • Retail
  • Industrial
  • Healthcare facilities
  • Data centers
  • Telecommunications infrastructure

The sector in which a REIT operates can have a huge impact on the bottom line, and the performance of each sector can vary year over year.

A retrospect of 2020 demonstrates just that. As millions of workers across the world were sent to work from home, office buildings and retail storefront worldwide stood empty as leases lapsed and were not renewed.

As a result, office REIT’s year ended with a net loss of almost 20%. Around this time last year, office REIT investors were celebrating 30%+ returns.

Meanwhile, e-commerce demand skyrocketed. In May of this year, even fast shipping MVP Amazon had to remove non-essential items from its 2-day prime delivery schedules.

All that demand meant the need for shipping fulfillment centers, part of the industrial sector, increased significantly. HappyNest has an industrial property in its portfolio, currently leased by shipping logistics company FedEx, that is enjoying this appreciation.

Property-Cards-Gold happynest properties in ints real estate investing portfolios
Properties in HappyNest’s real estate investing portfolio

Choosing The Right REIT For Your Investment

At the end of the day, every investor wants to protect the value of their investment and gain a little alpha along the way.

Though 2020 wasn’t the best year for REITs as a whole, some sectors thrived. Even for those that didn’t, as the old saying goes: Buy low, sell high. The dip in performance could prove to be a great entry point. REITs have historically outperformed stocks and other asset classes consistently.

Successful REIT investments are often the product of accurate predictions of what comes next.

HappyNest remains confident in its portfolio of properties’ ability to weather – and even thrive – in the upcoming year. Are you ready to start investing in REITs?

Make Money From Anywhere By Investing In Real Estate

According to Forbes, a full quarter of Americans have zero savings in their retirement accounts. Saving up for retirement does not mean working three jobs and surviving on barebones. Passive income is the solution most U.S. households are looking for! Start earning passive income today by using commercial real estate investing applications. Here are a few things to expect from the best investor apps:

The Best Investor Apps Are Completely Portable

Whether you are at home or on-the-go, one of the benefits of investing in real estate through an app is that you can do it from anywhere. Once downloaded, you can access the applications as long as you have your smartphone or tablet on-hand. These apps afford you flexibility and options. The HappyNest app, for example, enables you to review your investment portfolio and adjust important account settings directly on the app.

Real Estate Investing Can Be A Background Activity

What is passive income? Investopedia defines passive income the following way: “Passive income is earnings derived from a rental property, limited partnership, or another enterprise in which a person is not actively involved.”

This income is–as you might expect–passive or something you can do with minimal effort. Given Americans’ always-busy lifestyle, a form of income that requires minimal attention is a promising prospect. While some employers and the media tout busyness as a status symbol, according to the Atlantic, all of us fall into the trap of rising to meet those expectations and having packed schedules with very little time to spare.

With the best investor apps, earning extra money and doing it while busy is possible. Simply decide how much you would like to invest and leave the rest to the professionals on the investment team. The properties pay dividends, which increase your profits and allow you to diversify your retirement portfolio income.

Support Through The Whole Process

One of the most challenging parts of investing in real estate for profit is not knowing where to get started. A full 89% of Americans are interested in adding real estate to their investment portfolio. Often, a person’s interest does not convert to action because they do not understand what to do next.

The best investor apps get rid of the guesswork. Many of these apps walk you through setting up an account, and their investment teams select the best properties for you. If you have any questions, many apps offer full in-app support.

The current facts on Americans’ finances may seem grim. In a nutshell:

CNN reports that 60% of U.S. households do not have enough emergency savings for an expense in the $500 to $1,000 range.

A surprising 78% of Americans live paycheck to paycheck, Forbes reveals.

According to USA Today, 42% of would-be parents do not feel financially prepared to have a child.

The good news is that these insights and circumstances are not set in stone. U.S. households can take action to reverse these trends–and they can do it with minimal effort by using real estate investing to earn and save passive income.

Are Real Estate Investing Apps Good Tools for Beginners?

Real estate investing is an excellent way to create residual income, improve your financial picture, and generate passive income for yourself. And thanks to the development of real estate investing apps and other technology, there has never been a better time to get started. Here are a few tips for getting your start in real estate investing, even if you don’t have any experience.

Research Top Investing Apps

With the increase of mobile and smartphone technology, the real estate investing space has witnessed tremendous innovation. Smartphones have made the investing process easier for anyone interested. If you’re looking to start your real estate investment journey, then exploring some of the best investing apps is an excellent starting point. As one of the top investing apps for real estate, HappyNest gives you the ability to invest on the go. You can check in on the status of your current investments, purchase shares of a REIT quickly, and monitor your growth all from one easy to use interface.

Learn About Real Estate Investment Basics

While you don’t need to become an expert on real estate investing overnight to get started, it certainly doesn’t hurt to learn some of the basics. Thankfully, it’s never been easier to find information about real estate investing. For example, there are many tax benefits received from investing in real estate that help maximize returns. New tax laws that went into effect this year now allow for a 20% deduction of income earned through pass-through entities such as LLCs. With a few hours of research and education, you’d be surprised just how much you can learn.

There is a wealth of information freely available online also. Many of the top investing apps even offer informative sections and educational modules to help you improve your literacy in the arena of real estate investing. Knowing your way around some basic terminology and concepts could lead to incredible results for your portfolio in the long run.

Work with Tools Designed for Beginners

Whether you’re a complete novice or you have limited experience, and you’re looking to improve, there’s no denying that real estate investment apps are excellent beginner’s tools. At HappyNest, we understand that you might not know everything at once. That’s why we’re one of the top investing apps for beginners.

With the HappyNest app, we are here to help you get started on your journey into real estate investing. HappyNest makes it easy to get started with investing, whether you’re putting in $5,000 or $500. Get in touch with us today for more information.