Dividends from real estate investment trusts are an excellent form of passive income. Today, we have a guest post on this topic…
If you are looking for a way to make easy money in real estate without having to deal with all of the normal hassles of being a landlord to all kinds of horrible tenants, REIT investing may be an option for you to consider. Most people have never heard of this type of real estate investing before. When you are looking for ways to diversify your investment portfolio, real estate is a great choice. Many people wonder how investors who don’t even own their own home turn into other people’s landlords.
What Exactly Are REIT Investments?
REIT stands for Real Estate Investment Trust. It refers to when a company owns, bankrolls or manages income-creating real estate. The rent that is generated from each property the company collects from will be distributed to the real estate shareholders as dividends. This works similarly to mutual funds and trades completed on the market exchanges. It allows several independent investors to pool their money together in order to make investments in larger real estate opportunities they wouldn’t have been able to afford alone.
When you purchase stock in REITs, you will own a small portion of an office or apartment building that has been bought by a large company. Because of the nature of investing in real estate, REITs usually perform best in low-interest rate markets. When in a high rate market, the ride is a bit bumpy for REIT investors.
Qualifying For REIT
There are many guidelines a company has to adhere by in order to qualify as a REIT. These guidelines were put into place by Congress. They are to include the following:
- Considered a corporation under the IRS revenue code
- Has more than 100 shareholders
- Has a board of directors managing it
- Does not have more than half of its shares held by five or fewer individuals
- Needs 75-percent or more of its assets in US Treasurys, cash or real estate
- Net income needs to be generated from real estate transactions of at least 75-percent
- 95-percent of REIT’s income needs to be passive
- Most of the taxable income needs to be paid out to shareholders by dividends
Types Of REITs
There are two different types of REITs and they include equity and mortgage. The most common type of REIT is equity. With equity REITs, the company will purchase, manage, remodel, build and sell real estate. Most of the revenue generated from equity REITs comes from rental income. The types of real estate properties equity REITs invest in include industrial, office, residential, retail and hotels. These companies will often specialize in specific property types. A residential equity REIT will invest mostly in single-family homes or smaller apartment buildings. Retail REITs will typically specialize in strip malls and shopping centers.
Mortgage REITs differ from equity REITs because they do not typically purchase real estate themselves. They will lend money to other real estate investors looking to purchase properties or buy existing mortgages. Revenue from mortgage REITs is generated from mortgage loan interest that is paid.
How To Make Income From Investing In REITs
Just with most investments, it will take money to make money. REITs will often pay out high dividends and can increase over time as the property gains value and appreciates. There are many companies that allow investors to get into REIT investing with as little as $500 to start. A company called Fundrise will offer crowdfunding options for real estate newbies to get started in real estate without any experience. REIT ETFs are exchange-traded funds that allow investors to begin investing with as little as $3,000 to start.