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Here’s a way you can invest in real estate with as little as $100…it’s a REIT. But how does this compare with just straight up owning rental property, and is it even worth owning a REIT in the first place? So lets analyze the pros/cons of each! Add me on Snapchat/Instagram: GPStephan
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Like I mentioned, this is an investment trust which acts as a holding company for real estate. By investing in this company, you thereby are entitled to some of their profit, in the form of dividends.
Pros to doing this:
-There’s pretty much zero barrier to entry. Anyone with $50-$100 can invest.
-It’s also really easy to buy into a REIT…open up any stock trading website or app, and boom, you’re done. You don’t need to go out looking for properties that cash flow for weeks or months.
-There’s also no management aspect of this. With a REIT you don’t do ANYTHING. You just buy it and forget it…done.
-It’s also really, really easy to sell…no need to pay a 5% commission, no need to show your home to buyers, no need to negotiate prices…it’s just as easy as buying a REIT. You just click “sell” and you have your money almost immediately.
-With a REIT, you’re really well diversified.
-How the income YOU get is taxed…you get paid in the form of a dividend. This is usually an amount that’s paid out quarterly, but it’s taxed as though it’s earned income, which means it’s taxed at your highest marginal rate.
-Because REITs pay high dividends, they usually don’t increase much in price.
-The third downside is that you don’t have any control over your investment…unlike a property where you can pick the color to paint the walls, how to remodel the property, or how to manage the property and how much to rent it for - with a REIT, you have zero control.
-You also can’t build equity in a REIT like you can with real estate.
Investment Real Estate Downsides:
-High barrier to entry…you generally need a large down payment and will need to have the income to support the loan payments.
-The second downside to owning real estate is the time commitment. Finding the right deal is essential - and it can take a lot of time. Then you have the time aspects of managing a rental property.
-Lack of immediate liquidity. I can’t just sell my property for top dollar within a day - it just doesn’t happen.
Rental Real Estate upsides:
-You can leverage your money. While yes, a REIT does invest in leveraged properties and you own a portion of that, generally the returns aren’t as high as when you do it yourself.
-Your income from rents is generally tax free. When owning physical real estate, you can depreciate the cost of the property against your rental income. Compare this to paying 22-37% taxes on dividend income.
-You have total control over your investment. This means you can find a really, really good undervalued deal where you make a significant amount of money.
-You’re able to borrow against the equity in your home - completely tax free.
So at the end of the day, this is what it really comes to…
If your goal is long term equity, owning physical real estate is the way to go. When you buy an investment property, you’re continuously building equity in a tangible asset. Having more equity in your asset also gives you the ability to refinance over time and use the proceeds to buy additional assets and grow your portfolio. More work, more time involved, more money long term. However, if you have a little money and want some exposure to real estate, a REIT could be a nice way to diversify. However, since dividends are taxed as ordinary income, it’s best to hold the REIT in a tax advantaged account like a 401k or Roth IRA to avoid paying taxes. This way you get all the benefits of having exposure to real estate, without the tax consequences of paying a stupid amount of taxes on it. Not financial advice ;)
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