How to Invest In Real Estate - Without Being a Landlord


As I enter my 30s, I notice that plenty of folks in my peer group are buying houses. Sure, we millennials might be buying at lower rates than other generations, but it is still happening!

As for me, I'm a cut and dry renter for the foreseeable future. Any amount of space larger than one room is too much for me. In fact, I currently share a tiny studio with another person, and I think I'd feel wasteful if I bought more space! Not to mention the hassles and risks of direct property ownership and management. It's just not something I'm in the mood for right now.

Yet, real estate is a great place to make money, and I want a nice, diversified portfolio with lots of different kinds of investments. The traditional way to do it is to buy a place, perhaps fix it, and then rent it out. This involves some serious elbow grease. Cleaning up after tenants, chasing down late rent payments, finding someone to mow the lawn, replacing disintigrating siding, roofing or a water heater... the Pandora's box of things to do is endless. I'm not ready to trade in my Saturdays of Minecraft, hot pot, bike rides and beach adventures for a pair of hedge trimmers or a drywall saw just yet. After all, I have a job (or three) and I'm not trying to get another one. I like my passive income just that - passive!

Luckily, there are ways to invest in real estate without becoming a repeat customer at Lowe's.

Imagine this: What if, instead of one person buying one house, a whole bunch of people got together and bought a whole bunch of houses, splitting between them the management costs, the maintenance, the rental income, and the profits when they sold?

And what if this entity was a trust, not a corporation, so you don't get double taxed on the profits?

And what if you could buy and sell your portion of this trust on the stock market?

Voila: it's the Real Estate Investment Trust, or REIT.


Pros: 

Spread out the risk: What if the big employer or industry in your city suddenly packed up and left, or something big and ugly was built in your neighborhood? Property values would go down quickly and there would be nothing you could do about it. If you only own a single house, the value of it is at more risk than if you owned a thousand little bits of a thousand houses.

No Work : Sit back and have an iced tea. You don't have to go hound your tenants for rent or go unclog their sink disposal for the 50th time this week. When you own an REIT, your only responsibility is making sure you don't pick a bad one.

The $500 House: My first REIT investment was $500. Until hipsters popularize living in cardboard boxes under the interstate freeway bridge, you're not going to be able to buy a rental property for $500. For a real house, you have to save up until you have a down payment.

Way Less Bookkeeping : When you're a landlord, you have to do some bookkeeping for your taxes: What is an expense? What is a capital improvement? You'll have to tally the income and file a schedule E. Depending on how organized you are as a person, tallying up Home Depot receipts could become a thorn in your side. Luckily, the REIT (or the brokerage you bought them through) sends you a tidy tax statement at the end of the year with all that math done already.

No Personal Leverage: Leverage is when you borrow money to make an investment. This has an amplifiying effect on whatever happens to you. If your investment makes money, you make more money leveraging because borrowing money allows you to buy more house. Double win! If you lose money, not only are you out the house, but you still owe what you borrowed, too. This is what happened to many mortgage borrowers in the '08 crash. Double lose.

Lots of people take out loans to buy investment property because if they wait until they can afford it in cash, they'll end up buying the house at the age of 73 and never have a chance to profit on rental income. This is leveraging. What happens in the case of a crash that brings property values down at the same time the borrower loses their job? They find themselves unable to make their loan payment anymore, without rental income, without the property, and still owing on the loan. Triple loss.

The REIT itself may borrow money to pay for more properties, but you will never end up losing more than you put in to your purchase of REIT shares unless, of course, you borrowed money to buy them.

Cons:


No Handyman Advantage: When you're a traditional landlord, you can save a lot of money if you're handy. As a REIT owner, your handiness is irrelevant. You'll never even see the properties, and all the maintenance work will be done by a professional.

You might miss out on homebuyer tax incentives: Unfortunately, you can't get a mortgage interest tax deduction on a loan you take out to buy a REIT. Similarly, you can't live in 1/100th of a home as your primary residence, so you miss out on a few tax moves you can do as a traditional property buyer.

You Can't Live in a REIT: A house investment pays some of its returns by giving you a place to live. You can't move into a REIT, and your friends might find you crass if you throw a housewarming party for your REIT.

You can't cherry-pick the properties: That's someone else's job, so you just have to trust they're picking winners.

They can make your taxes a bit complicated: I do my taxes by hand, and I spent literally half an hour filling out some extra worksheets because of a couple bucks of unrecaptured Section 1250 gains produced by my REIT. Realistically, that pocket change is capped at a lower tax rate than other income, which triggered the extra paperwork, so I should have been very thankful. If you do your taxes via a computer program or have a professional do them anyway, you should be fine.



Equity REITs vs Mortgage REITs


The kinds of REITs I am discussing here are Equity REITs. They invest in the properties themselves. There are also mortgage REITs, which earn their money by charging interest on mortgages.

Equity REITs don't have to just be homes. They can be retail, office buildings, hospitals/nursing homes, even hotels and self-storage!

How to Find and Buy a REIT


I can't advise you on which REIT to buy if a REIT is what you want, but I have a lot of fun researching REITs on Wikipedia's REIT list.

You buy it just like a stock. Log in to your brokerage account, type in the ticker symbol and amounts, and press "trade".

If you don't know what you're looking for, enlist a professional. Just make sure they aren't a commission based professional who is trying to sell you something for their own benefit!

Learn More about REITs:


SureDividend's REIT list of 173 publicly traded REIT stocks




The usual disclaimer: This is not investment advice, just general education and entertainment! REITs can get a little complex, so get a licensed professional who can give you specific advice based on your situation!

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