Dividends from real estate investment trusts are an excellent form of passive income. Today, we have a guest post on this topic…
Are you are looking for a way to make money in real estate without having to deal with all of the normal hassles of being a landlord to all kinds of horrible tenants? Then, 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 homes 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 is distributed to the real estate shareholders as portfolio dividend income.
This works similarly to ETFs and mutual funds. REIT trades are 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 luxury 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.
Related: 60+ investment assets that appreciate in value
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 the rental income produced from an asset portfolio. The types of real estate assets 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.
Either type of REIT can be part of an investing for income strategy.
Conclusions – 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 investment 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.
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Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. However, I am not a licensed investment adviser, financial counselor, real estate agent, or tax professional. Instead, I’m a 50-something-year-old, early retired CPA, finance professional, and business school teacher with 40+ years of DIY dividend investing experience. I’m here only to share my thoughts about essential topics for success. As a result, nothing published on this site should be considered individual investment, financial, tax, or real estate advice. This site’s only purpose is general information & entertainment. Thus, neither I nor Dividends Diversify can be held liable for losses suffered by any party because of the information published on this website. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.
Nice summary, Tom.
I’m still a big fan of REITs, with a good chunk of my net worth allocated. REITs still compose roughly ~90% of my overall RE exposure. These is in direct properties via Fundrise. – Mike
I like them too Mike, but I’m not as heavily invested as you. It’s great passive income especially for tax advantaged accounts. Tom
I have some REITs in my IRAs. They are nice to just sit there, collect the dividends and reinvest and not worry about taxes…for now, that is. It’s a good alternative for people who’d rather not invest a large sum of money and become a landlord.
Agree with your assessment SMM. I hold my REITs in my IRA for the same reasons as you. Tom
Hi Tom, REIT sounds a good option for people who want to invest in real estate, but don’t want to be a landlord. The related regulations help to control the risks in some way. I have not invested in REIT, but may take a look in the future.
I like the passive nature of real estate investing through REITs Helen. I would not have the interest in being a hands on property investor/landlord. Tom
Hi Tom,
I like residential REITs (and own a few), but am wary of commercial and retail REITs, because of the increasing tendency for people to telecommute and shop online, respectively.
Cheers,
Miguel
Good insight Miguel. Thanks! Tom
I finished reading your recommendation- The Ultimate Dividend Playbook, it was great.
I have NLY which is a mortgage REIT, I’m trying to get out of it (trying to avoid selling at a loss) but the distribution has been great so far!
Glad you liked the book GYM. I got burned during the financial crisis with a couple mortgage REITs so I stay clear of those. Tom
I have a few REITS, O and IRM come to mind. Usually high yielders and slow growth, I like to add then for some balance in my portfolio.
I own O too and like the company and stock Mr. R. I think property REITs are good for diversification in our dividend stock portfolios. Tom
I am a fan of REITs and added a nice collection to my portfolio. I’ve been interested in real estate for quite some time but never pursued rentals or flips because I don’t have a desire to be landlord (and even with a property manager I fear it would still be too much time) nor am I handy. Just this week I invested in a few crowdfunding deals though to explore that as another potential avenue for real estate investments.
We are similar in our lack DIY skills and limited desire to be active owners DD. I have not investigated crowd funding. It will be interesting to see how that turns out for you. Tom
I have personally been in the process of getting in the whole process of this for a while. I was gonna put money into real estate for some time and when I got a chance to make a good idea I had in mind use some of my gains to purchase apartments or something that I could fix for housing or shelter for veterans who are going through hard times or homeless and maybe even low income having a hard time getting work. And also make a difference in this world. And also help fight cancer
Good luck Anthony. You have some great ideas. Tom