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According to our Minority Mindset polls, 72 percent of people love real estate investing and almost half (48 percent) are actively investing in this sector. However, buying individual properties can be time-consuming and require a hefty initial deposit. REITs are a great addition to your portfolio, without the hassle of being a landlord or unclogging toilets.
Investing in a REIT is just like buying a stock: Investors purchase a share on a public exchange. Shares of REITs can be bought on platforms like Fundrise or Crowdstreet and sold at any time. They offer monthly or quarterly dividends, no hands-on management, and instant diversification as well.
With that said, let’s break down everything you need to know about how to invest in REITs, from what they are, to where to get started.
What Is A REIT?
REIT is short for Real Estate Investment Trust and offers investors tax advantages on their investment, because they are not required to pay corporate taxes.
Instead, they must pay out at least 90 percent of their taxable income as a dividend to their holders.
This makes them much more advantageous for passive income when compared to other types of stocks or funds.
A REIT must invest at least 75 percent in real estate and come up with 75 percent of its income through real estate. This can be done in one of two ways:
- A mortgage REIT
- Or an equity REIT
In an equity REIT, investors essentially own and manage a collection of properties. The fund has a real stake in the property, collects rent from tenants, and provides property management.
On the other hand, a mortgage REIT owns the mortgage for a given property and collects the interest from the financing without actually owning the property itself.
How do you get involved in investing in REITs? The answer depends on what type of holding you are most interested in.
How To Invest In REITs
The three main types of REITs are:
Let’s take a closer look at what you can expect with each investment.
Public REITs can take two different approaches: publicly traded REIT stocks and publicly traded REIT funds. Stocks are registered with the SEC and trades are facilitated on the stock exchanges that most investors are familiar with.
This is perhaps the most popular way to invest in REITs as publicly traded REIT stocks frequently come with lower management fees and more governance.
Unfortunately, these stocks do have a shadow side as well. Investors may find that their prices can decline for several reasons, even if they cannot seem to pinpoint it.
As always, there are risks to buying stock shares such as bad management, poor decision-making, and even high debt loads.
On the other hand, investors may prefer to invest in publicly traded REIT funds for added security. In an REIT fund, investors can purchase a single share and get a stake in hundreds of REITs that are publicly traded.
Each fund is comprised of several sub-sectors including:
- Residential properties
- Commercial properties
As a result, investors can benefit from having more diversification in their portfolio and have less risk associated with their holdings.
However, you may still find that there is some risk to funds like these that can’t be avoided. Because it is invested solely in real estate, your holdings are not as diversified as they could be with other types of mutual funds or ETFs.
While public may be the easiest entry point into REIT investments, accredited investors may want the option of a private REIT. These do not trade on any exchange and are not registered with the SEC, limiting the overall governance on the fund.
The minimum investment is often higher on private funds, starting at $1,000 and running up to approximately $25,000 or more.
With private REITs, it can be very challenging to access your money if you need it as private REITs tend to be more illiquid than the publicly traded counterparts. They may have higher fees for management and that management may demonstrate a clear conflict of interest without any intervention from corporate policies.
If you aren’t sure whether to go with public or private REITs, then you may want to consider non-traded REITs as a happy medium.
These funds are registered with the SEC to give investors more corporate oversight, but they are not traded on major exchanges.
Quarterly and year-end filings are available to everyone, making your potential investment clear.
The downside to non-traded REITs is very similar to that of private investments. They are illiquid, have sizable management fees, and may present a conflict of interest for the management with little to no oversight.
Platforms For REIT Investments
If you are thinking about adding REITs to your investment portfolio, you need to know where to go to get started.
While publicly traded funds can be purchased through a brokerage account, investors may want to invest through platforms that specialize in REITs and real estate such as Fundrise and CrowdStreet.
Non-accredited investors will want to check out Fundrise, particularly if they are interested in just getting their feet wet with REITs.
This platform is simple to use and is open to all investors regardless of portfolio size or annual income. As a result, they specialize in offering investments at a low account minimum of just $10.
Fundrise also has low fees, a major concern for many investors who want to maximize their return on investment.
The only downside is that Fundrise is designed for long-term investments that can tie up funds for five years or more. Investors who are looking for short-term investments may want to think long and hard about whether REITs are the smartest move for them.
What sets Fundrise apart from the competition? Here are the best features that have enticed over 150,000 non-accredited investors to turn to the platform:
- Customizable portfolios with automated investing
- Low account minimums
- Incentive for referring friends (180 days of advisory fees waived)
- Low fees (1% management fees)
- User-friendly mobile app
Accredited investors who have some spare cash to invest will want to weigh their options with platforms like CrowdStreet.
These accounts come with a higher account minimum ($25,000), but have plenty of potential to earn passive income on both residential and commercial deals. They have done more than 650 deals and counting and raised $3 billion in capital.
The platform is simple to use, even for investors who have never considered REITs before.
However, like Fundrise, CrowdStreet can tie up funds for a long time. REITs are meant to be viewed through a long-term lens which makes it difficult to cash out of your investments. It keeps you from making impulsive decisions to sell your shares when the market gets a bit rocky.
If you are an accredited investor looking for an easy entrance to the real estate market, Crowdstreet holds a lot of promise. Take a look at some of its best features to determine if this is the right money move for you:
- Lots of commercial real estate opportunities
- Low fees (starting at just 0.5%)
- Easy-to-use website
Pros And Cons Of Investing In REITs
What should you know about REITs before you make your first purchase? Here are both the good and the bad aspects of this investment strategy for your portfolio.
- High Dividends: Without the headache of managing properties, you can still earn consistent income from your real estate portfolio with this investment strategy.
- No Hands-On Management: With a REIT investment, someone else is responsible for handling repairs and all of the other less glamorous aspects of property management like collecting rent.
- Diversification: You’ll instantly get diversification in your portfolio because you will be exposed to real estate through passive REITs.
- Easy to Get Involved: With REITs, you can buy and sell shares much more easily than you could buy and sell properties.
- High Debt Load: Investors need to do their homework to ensure that the company they invest in is likely to pay down their debt without sacrificing the dividend to do so.
- Rising Interest Rates and Property Prices: As interest rates are starting to rise again, you may see an initial drop in the price of REIT stocks. The price of homes is relatively high right now which causes share prices to soar.
- Unstable Dividends: Make sure to invest in REITs that promise more sustainable dividends.
- Illiquidity: Plan on investing for at least five years to see the best results.
Using REITs To Build Your Portfolio
Adding REITs to your portfolio requires you to be a savvy investor. How much of your savings should you allocate toward this investment vehicle?
While it can be beneficial to add some REITs to your portfolio, you don’t necessarily want to invest all of your spare cash into one of these platforms.
As with all investment strategies, how much to invest in REITs depends on your goals and risk tolerance.
A good rule of thumb is to invest anywhere from 5 percent to 15 percent of your portfolio into REITs.
Most experts state that your age and proximity to retirement does not necessarily have to factor into your decision about how much to invest.
However, you may still want to scale back on REIT investment once you hit your golden years, as real estate can be volatile at times and you want to instead allocate more funds into less risky investments.
Younger investors who are far from retirement should consider allocating more of their portfolio to REITs, usually at the high end of 15 percent or more.
As they move closer to retirement or decide to end their careers early, most people cut their REIT investment in half for a number closer to 7 percent.
After you have been in retirement for a while, you may even want to cut that number further to 6 percent or less.
How To Use Fundrise
If you're ready to start investing in REITs, then you’re in luck!
Using platforms like Fundrise makes it easy to get started with minimal investment of just $10.
You can easily start investing in REITs today with Fundrise by:
- Opening an account & choosing a plan
- Fund your account with either a one-time investment or a recurring investment
- Choose your portfolio and search for the perfect REIT
If you invest less than $1,000, you will only be able to invest in the Starter portfolio, making it easy for you to decide what to do.
Investing larger amounts allows you to determine whether you want to invest in a growth portfolio (purchasing value-added properties) or a more conservative portfolio with established cash flow.
Are REITs Right For Your Investment Portfolio?
REITs are a great investment vehicle for investors who want passive income through the dividends that these investments often yield.
While they are designed for long-term investments, REITs are accessible to just about everyone with low minimum investments starting at $10 if you use a platform like Fundrise.
If you have been thinking about getting involved in real estate investments, REITs are a hands-off way of doing just that.
Make sure you do your homework on any particular stock or fund, understand the risks, and allocate a certain amount monthly that makes sense within your investing plan.
This can be a great asset for those who want to invest in property but lack the funds or time to do so.
And if you’re ready right now, you can sign up for an account with Fundrise for free, today!