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.
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.
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.
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.