Make Your Money Work Harder For You

Why Should You Invest in REITs

A more liquid alternative

The idea of owning a physical property as an investment may sound enticing, but the process of doing so is rather complicated. Issues such as filing various documents, maintaining the property, finding tenants, managing tenants’ expectations and eventually finding a willing seller can take up a lot of your time and effort.

But with REITs, you can purchase or sell units as easily as any other publicly traded company, making REIT investments an attractively liquid investment over the traditional real estate purchases.

Diversification

As with any other stock, a REIT’s unit price may appreciate over time, rewarding you handsomely if you buy into the correct REIT at the correct time. For example, when an investor buys, say, 100 units of Vornado Realty Trust, his money is now diversified into offices, street retail, residential and development properties spread across New York, Washington and Manhattan. This is the power of investing in a REIT: it gives retail investors the opportunity to derive rental income from multiple sources which were previously not accessible to them.

More cash in your pocket

As a shareholder of a company, you are entitled to a share of the profits if your company does well. However, that does not mean you get cash back into your pocket immediately. The management will decide how much to give back to investors and how much to reinvest. And most companies tend to keep most of their profits.

This is one marked difference between REITs and your average equity stock investment.

Unlike stock investment, REITs have to pay out at least 90% of their taxable income to unitholders in order to enjoy certain tax exemptions. Note that the cash REITs pay out are known as ‘distributions’; while some REITs pay out quarterly distributions, others pay out on a semi-annual basis.

What this means for you as a unitholder is that you will see more certainty in getting your money back than you might from other investment vehicles. If you’re the kind of person who prefers dividends over “paper gains”, REITs will definitely not disappoint.

Easy to understand business

It doesn’t take a genius to understand REITs, how they work, the risks involved and so forth. Moreover, like other public companies in the US, REITs are required to make regular financial disclosures to the investment community, including quarterly and yearly audited financial results that are filed with the Securities and Exchange Commission (the SEC).

As such, each REIT works on a transparent basis with virtually all the relevant information available online. This means that you can easily conduct research on REITs, unlike some other investment opportunities (be it art investment, land banking, or private equity) which don’t have the same public financial disclosure requirements and obligations.

I hope these four benefits will get you excited about REIT investment. But most investors I know prefer to ask this question…

How much money can I make from REITs?

Financial Freedom, Fantasy vs. Reality

Financial freedom may mean different things to different people, but for most of us, the heart of “financial freedom” is to not be totally reliant on a job for survival and to have the freedom to choose without the worry of not having enough.

Achieving financial freedom is as simple as getting your passive income to exceed your necessary spending. Considering today’s ever-increasing cost of living, achieving financial freedom seems like a daunting task to most average working adults.

Statements like “All you need to do is put USD 1,000 of your monthly savings into a REIT fund which gives 15% annually, and you will become a millionaire, after 19 years of saving and investing” are rather misleading.

A more realistic example would be:

Aaron is a young working adult. At 20, he starts investing USD 1,000 monthly into a REIT Fund which gives him an average compounded return of 7% annually. (7% is a conservative yield average of all US REITs for the last decade.)

After ten years, Aaron’s investment will grow to USD 173,986. By then he decides to get married and liquidates USD 100,000 to buy a new home. He leaves behind USD 73,986 and continues with his USD 1,000 monthly deposit for the next ten years.

By 40, Aaron would have USD 317,560 and a home to stay. Not bad for someone who just invests USD 1,000 every month.

So, this is what REITs investment can do for you realistically.

My point is that you should be patient and allow your REITs to grow; likewise, stay cautious of any fund that promises exceptionally high returns without having a proper understanding of how the investment works and what risks are involved.

Check out other good reit articles:

http://www.smallcapasia.com/buy-hold-reits-long-term/

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