To Some, Purchasing REIT's May be A Wiser Alternative to Land Ownership
By Anthony Rhodes
We’ve all heard the famous axiom “Buy land, God isn’t making any more” which emphasizes the inherent benefit of limited quantity made available to real estate owners. The desire to purchase land strikes at the core of our beings as citizens, and the ownership of property remains our ambitious pursuit, while standing as the centerpiece of what we call the American Dream. When one thinks about the advantages of real estate as an investment, it’s also difficult to argue with their conclusions. After all, land can be made to produce income, can be passed down to future generations quite easily, and perhaps most importantly of all, usually appreciates in value. Certainly, this product is an aspiration for many individuals. But is it a suitable investment for all who are drawn to its potential benefits?
While real estate as an investment makes sense amongst those with both the time and resources available to cultivate it into a worthwhile financial endeavor, others who are attracted to its alluring qualities, may not fare as well in their attempts to produce similar outcomes. So, what should one do if they wanted to participate in this multi-billion dollar business, but lacked the commitments of time and money needed to do so in a traditional fashion? To some such individuals, REIT’s may offer the perfect solution. And although they may not provide many of the tangible benefits enjoyed by landlords and other real estate owners, the good news is, they don’t have many of the potential headaches, either.
To REIT or to REIT?
First of all, let me explain to you exactly what REIT’s are. The acronym REIT stands for Real Estate Investment Trust, and they are offered in two different varieties: equity REIT’s and mortgage REIT’s. An equity REIT is an investment, which actually purchases real estate. As a shareholder of the product, your profit or loss is determined by either the income it receives from rent, or by the selling of properties. Conversely, a mortgage REIT works more like a bond, in that it loans money to real estate owners, and passes on the interest it receives to its shareholders. The determination, as to which REIT is right for you, usually depends on how aggressive or conservative you are as an investor. More aggressive investors are generally attracted to equity REIT’s, with its potential for higher gains. Conservative investors usually like mortgage REIT’s because of its relative safety and predictable revenue streams. But what makes either of these products so appealing to many of those bitten by the real estate bug, is that they don’t have to track down tenants or provide facility maintenance, but can still receive the proceeds generated from real estate property. This benefit alone makes sense to those without large sums of money or the credit requirements necessary for individual real estate purchases, and can prove a pretty good diversification play for your portfolio, also.
Shut Down Start Ups
When one makes the decision to purchase real estate as an investment, there are a few necessities, which warrant consideration. First, there’s the money needed to actually buy the property. Next, is the cost of advertising to attract tenants (or if you’re a “flipper” the costs associated with refurbishing the property). It would also be a good idea to have a reserve of cash in case your search for tenants goes longer than expected. Also, there are the insurance costs. Don’t forget improvement costs, utility costs and many more that I’ve yet to mention. In fact, the start up costs alone could set one back quite substantially, long before a single dollar of rent is received! On the other hand, when one purchases a REIT, she doesn’t have all of these issues to contend with. The product is relatively inexpensive to purchase, has no recurring maintenance fees, and puts your money to work immediately, all the while performing the same function of investing in real estate.
If you find the prospect of dealing with tenants or managing property an unattractive part of the real estate experience, investing in REIT’s may be a wiser alternative. Owning these products will undoubtedly satiate your appetite for the monetary rewards of investment property, and will also help to insure that you don’t bite off more than you can chew in the process.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com)