Pros & Cons of Investing in REITs
REITs are another way to invest in real estate - learn more about what the pros and cons are of investing in them.
If you haven't heard of an REIT, it stands for real estate investment trust. It is pretty much a company that owns or finances income-producing real estate across a variety of sectors/industries. REITs are purchased in the stock market and generally require much less cash upfront compared to a down payment for a physical property. There are a lot of benefits of investing in real estate, but today, we're focusing on the pros and cons of investing in REITs.
Pros:
+ Don't have to deal with physical property and things breaking/needing to be fixed: the complete opposite of the pros and cons of investment property, here you don't have to deal with any physical property. That is a huge weight lifted off your shoulders as taking care of the maintenance can be very time consuming and if you choose to hire a property manager to do that, it usually eats into a significant chunk of profits.
+ Can start with a small amount of money and continue investing each month: REITs can be purchased through a broker/brokerage account. Many brokers allow investors to purchase fractional shares, so instead of buying a whole share, which can in some cases be a lot of money, an investor can purchase 1/4 of a share with the money they have. This makes investing much more accessible to the public as you don't need a large amount of sum to get started.
+ Offer high dividends: REITs are known to offer high dividends, as the SEC mandates them to distribute at least 90% of their taxable income to shareholders. You, as a shareholder, then get to benefit from owning this stock wit a 5-9% dividend per year. This dividend is pretty much your interest for owning this stock and can also reduce the loss on this stock if you are losing money on it.
+ Can easily cash out whenever you need/want to: Owning physical property is hard to turn into cash when needed, especially for an emergency. You need to list the property, show it to potential buyers, accept an offer, and close on the property - all of which takes at least 2-3 months to do. However, owning REITs is the complete opposite experience. Like stocks, it is easy to buy or sell, so you can cash out whenever you'd like. Yes, there is still a waiting period for your funds to clear and for you to send the funds over to a bank account, but that will take about a maximum of 1 week compared to the 2-3 months with physical property.
+ Tend to do well in times of inflation and do not always follow stock market fluctuations: Why is this the case? Rents tend to rise as inflation rises, which then increases revenue and net earnings for REITs. That will then get passed back to you as a shareholder in the form of a dividend. Typically, stocks are more volatile when inflation is high, so returns are not as strong. REITs are great to have in your portfolio during this time as it can balancing out the volatility of the stocks.
Cons: