Real estate investing is a time-honored method for building substantial wealth. However, I learned the hard way it’s a long, dirty way to the top for the undercapitalized, do-it-yourself investor.
Having voraciously read Robert Allen’s seminal book, Nothing Down, as a college student, I decided to purchase a duplex in what I believed was an up-and-coming part of the city.
Following the guidance in the book to the letter, I was able to buy the dilapidated building with little capital of my own, financing the rest.
After several weeks of hard, dirty work that I did not enjoy in the least, it was time to rent out the units. Everything went perfectly for the first several months — until things started breaking in the building. First, it was the water heater, then the electrical system shorted out, and then the furnace blew up! Along with this trouble, both of my tenants lost their jobs and refused to leave their apartments.
It turned out that both of the tenants were experts at avoiding eviction. They seemed to know the law better than the attorney I was forced to hire. Months went by with zero income from the building, and I was trapped, with zero chance of selling an illiquid investment that was costing a small fortune to maintain.
If you or anyone you know own investment real estate, I am sure you can relate to my unfortunate experience.
Investing hard labor into fixing up bargain-priced properties and dealing with troublesome tenants is not for everyone. Sure, you can always outsource the work to contractors and the residents to a management company, but operating in this manner will likely eat up most of your profits.
Make no mistake, fortunes are made by directly investing in real estate. If you can do the work yourself, have the capital to make it through the lean times, and enjoy dealing with tenants, it makes sense.
However, for many of us, the problems with owning investment properties far outweigh the upside.
Fortunately, there is an alternative for those who understand the upside potential of real estate investment but do not wish for the hassle of direct ownership. In other words, it’s a clean, simple way to invest in real estate with instant liquidity and income.
You’ve probably guessed I’m talking about real estate investment trusts, or REITs for short. These exchange traded instruments open up real estate investment to everyone.
REITs typically offer relatively high dividends and the potential for moderate, long-term capital appreciation.
However, it’s critical to note that long-term total returns of REITs have historically been less than the returns of higher risk, high-growth stocks and somewhat more than the returns of lower risk bonds.
The law requires REITs to return 90% of their taxable income to shareholders in the form of dividends. This is why REITs are often paying the highest dividends in the stock market.
The income is created from the relatively stable and predictable stream of contractual rents paid by the tenants who occupy the REIT’s properties. Unlike my foray into real estate, REITs are professionally managed, and the tenants voraciously screen by state-of-the-art techniques. These facts, combined with large portfolio size, greatly mitigate the risk faced by individual REIT investors.
Recently, REITs have suffered in the face of climbing interest rates and negative investor sentiment. On average, REITs have fallen 7% over the last six months and are yielding approximately 4% across the board. This dramatic change from an average dividend and appreciation return of 12% over the previous five years is what led to the negative investor sentiment.
The bullish news is that the tide turning back in favor of REITs. While traditional income-focused investments fail to perform in the face of looming inflationary pressures, REITs are uniquely designed to fight inflation.
The primary fuel for inflation fighting is the fact that inflation will allow increased rents across the board in both commercial and residential properties. Increased rents lift the profits of REITs, hence the returns. Also, increased interest rates do hit REITs negatively in the short term.
However, over time, the effects appear to be negligible in most cases.
Here Are 5 REITs You Need To Know For 2017 And Beyond
1. SL Green Realty Corp (SLG)
This commercial office based REIT has bucked the overall downtrend, returning 21% over the last 52 weeks, and yields 2.84%
2. Crown Castle International Corp. (CCI)
This REIT is unusual in that its “tenants” are cell phone towers. The company owns and leases mobile phone towers to the various carriers. It eased higher by 5.9% over the last 52 weeks and yields 4.39%.
3. MGM Growth Properties LLC (MGP)
Specializing in gaming and lodging, this REIT is trading higher by 3.3% year to date and yields just under 6%.
4. Prologis Inc (PLD)
A combination real estate investor and venture capital fund, Prologis is trading higher by 27% over the last 52 weeks but remains lower by over 5% in 2017. It is currently yielding 3.35%.
5. Retail Opportunity Investments Corp (ROIC)
An investor in strip mall-type properties that returned 12.3% over the last 52 weeks. It is currently yielding 3.43%.
Risks To Consider: We live in uncertain times as the new Presidential administration gains its footing. Although new policies are expected to be REIT-positive, no one knows for certain what the future holds.
Action To Take: Now is the time to allocate a portion of your income-producing portfolio to a variety of REITs.
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