Plenty of savvy investors use real estate as a way to earn income. You buy a property, rent it out, and, ideally, pocket some extra cash. And low mortgage rates and a steadily improving market have experts insisting that now is a great time to invest in real estate. But what if you can't afford to put a down payment on a home in your area? Or what if you don't feel like playing landlord and renting out a property? You might be interested in REITs—Real Estate Investment Trusts.
A REIT is basically a company that owns and produces income from real estate. You buy shares; you profit if they profit. In his own article on the matter, financial guru Mr. Money Mustache cites a few reasons why owning REITs might beat landlording.
- Diversification: A REIT might own properties across several states, giving you a broader investment.
- Dividends: REITs are required to distribute 90% of its income back to its shareholders. He notes that the tax implications of this (dividends are treated as regular income) aren't as good as rental house income, but he says it's worth it.
- Control: You can invest whatever amount you want
I came across Mr. Money's post on this in doing my own research on REITs, but it's important to note—the post is from 2011. So how have these investments held up? And are they still a good idea?
While they've had a steady increase in the past few years (check out the above Vanguard REIT fund) some investment pros worry that will change soon. One analyst recently told CNBC:
I think we are going to see a pullback. I think in the near term there's some potential weakness, but our view at this level, real estate is fairly valued.
But others say it's still a decent investment to keep your portfolio diversified. If you're considering a REIT, Bankrate offers a few tips for smart investing. Check out their full post, but a couple of them include:
- Stick with publicly traded REITs: They outperform privately traded REITs, according to Bankrate.
- Avoid newly issued REITs: It's harder to track their success.
And if you want more info on why investing in a REIT might beat being a landlord, check out Mr. Money Mustache's full post.
Become a Lazy Landlord – with REITs | Mr. Money Mustache
Photo by American Advisors Group.
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