We want to show you how to earn passive income from REITs.
Have you ever heard the common statistics that millionaires have 7 income streams?
At first thought, it seems like it would be a tedious process to manage that number of businesses until you consider that a majority of such streams could be passive. Well, that’s why we want to share with you how to earn passive income from REITs: Real Estate Investment Trusts.
Before we dive in, if you want to learn about how to earn passive income from REITs: Real Estate Investment Trusts quickly, click on any of the links in the list to be taken RIGHT to that topic!
- What are REITs?
- 5 reasons why investing in REITs is a good way to generate passive income
- How to Identify the Right REIT to Invest in
- Compare REITs
- How to Start Investing in REITs
- How to make the most out of your REITs Investment
So you are looking to be a part of that millionaire statistic by generating passive income, then you should consider investing in real estate through REITs.
“There is a rapid increase in the interest in REITs global and currently about 37 REIT markets with an approximate total market capitalization of US$1.7 trillion.”Source
What are REITs?
REITs or Real Estate Investment Trusts are companies that own, bankroll and manage income-generating real estate.
As such, REITs enable individual investors to own real estate that they are unable to own on their own. People that do not even own their own houses can enjoy the financial benefits that property owners do by investing in REITs.
In other words, we love this great summary by Investor.gov, “REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.”
“REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.”
Buying shares in REITs enable investors to take part in the large returns that REITs get annually.
“90% of the taxable income that REITs generate is distributed to investors in the form of dividends. This is a great way of generating income, especially for retirees.”
Real estate investments are durable and stable in value as its value is limited and flexible. Except when badly mismanaged, real estate investments can’t become worthless.
They are resistant to inflation because as the population increases, the available land decreases, making the value of real estate’s grow in a direct positive correlation to population growth and the rates of inflation per time.
“The average occupancy rate for the real estate industry has been steadily increasing within the range of 93% to 94 % since the end of 2013.”
However, investing in real estate can be very lucrative but also very stressful and doesn’t exactly fall into the category of passive income unless you are doing it through a system such as REITs that will help you do all the hard work.
REITs facilitate passivity and reduce the risks of investing in real estate. The capital required to invest in REITs real estate is minimal when compared with the huge amounts you will need if you are investing on your own.
5 reasons why investing in REITs is a good way to generate passive income:
1. Professional Management of Properties:
There are many stressful processes you will come across as a private property owner, like having to complete all legal works yourself, hiring contractors, getting tenants to pay their rents and carrying out routine repairs and maintenance.
All these activities make investing in real estate privately anything but passive.
But with REITs, you will be enabled to enjoy the benefits of being an investor without going through all the tedious processes listed above.
Professionals handle stressful activities in a cost-efficient way. A professional team is responsible for caring for the real estate all year round; these professionals are trained in managing real estates and will do a better job than you will.
All you’d have to do is sit back and watch them do their work while your dividends keep coming to you. Now that’s very passive.
“All you’d have to do is sit back and watch them do their work while your dividends keep coming to you. Now that’s very passive.”
2. High Income Generation:
The annual yield of REITs is high. For instance, Singapore REITs have an annual yield that ranges from 5% to 8% – you can read more about REITs ETF Singapore here.
In fact, S-REITs index rose by 7.3% from April 2018 to February 2019:
All REITs by law payout 90% of their net income in dividends to investors and the average returns of investing in REITs is from 7% to 11 % more than the returns on individual properties.
Aside from the fact that the cost of purchasing REITs is low, investors can also diversify broadly across different REITs.
A single REIT can own dozens or thousands of properties in different areas of a country and some cases in different countries. In the first quarter of 2019, the net acquisition increased after five years of staying neutral, with about $12.5 billion worth of new acquisitions made.
This allows investors to own an investment in a portfolio of hundreds of properties. REITs investors have a diversification advantage over private property owners and they have a more secure and stable cash flow.
4. Low Transaction Cost and Liquidity
Individual property owners usually encounter difficulties when liquidating their investment.
The process of listing, preparing and selling of the properties can be stressful, costly and time-consuming. Most often, the property owner has to sell below the market value. This, however, is not the case with REITs.
As you can easily liquefy REITs stocks and sell shares with one click of the mouse. REITs stocks sell at the current market price as well.
Also, the transaction cost of REITs is minimal, unlike other real estate investments that may charge up to 10% for transaction costs.
“The transaction cost of REITs is minimal, unlike other real estate investments that may charge up to 10% for transaction costs.”
5. Long-term Returns:
Due to higher cash flow growth, cost efficiencies, scale advantages, and better management, REITs outperform private real estates by up to 4% per year.
This is because REITs experience faster growth rates than private estates.
Private investors also tend to take too much leverage, which gives them a false sense of security during prosperous times, REITs, on the other hand, takes a long term approach and maintain a medium level of leverage, this saves them from the risk of going bankrupt or permanently losing during economic crises.
How to Identify the Right REIT to Invest in
Before examining how to identify the best REIT to invest in, it is important to note that there are two kinds of REITs:
The revenue for equity REITs comes from rental income on residential, industrial, office, hotels, and retail properties. Equity REITs specialize in a specific kind of real estate. For instance, a Residential REIT invests in homes or apartment buildings.
They buy existing mortgage-backed securities and mortgages. They also lend money to real estate buyers. Just like equity REITs, mortgage REITs also specialize in either commercial or residential mortgages.
“90% of REITs are equity REITs whereas only 10% of REITs are mortgage REITs.”
To identify the best REIT for you to invest in, you need to do a lot of research.
There is much misleading information put out by financial advisors that you need to be wary of following.
Read lots of financial reports and check out the following features of all the REITs you compare:
1. The Price-Earnings Ratio:
This indicates how costly the units of the REITs are to its annual earnings. Even though a low PE is more promising, avoid REITs with PE ratio lower than 5 or 6 this is a sign that the REIT will not experience any significant growth.
2. The Dividend History:
A good REIT should have historical data showing a steady rise in dividends.
3. Dividend Pay-out Ratio:
A high dividend payout is an indication of poor management of the REIT. It means that over time the company won’t be able to sustain the dividend.
How to Start Investing in REITs
Investment in REITs is the same as that of any other industry. To start earning from REITs all you need to do is to buy stocks through ETF on the stock market or through a mutual fund.
“Investment in REITs is the same as that of any other industry. To start earning from REITs all you need to do is to buy stocks through ETF on the stock market or through a mutual fund.”
When you do this, you earn a percentage of every income generated by the investment. REITs are usually exempted from corporate taxes and this increases what shareholders earn.
Shareholders are however expected to pay capital gains taxes on the dividends they get from the investment.
So how do you invest in REITs?
By investing in ETFs and eREIT.
REIT ETFs are exchange-traded funds that mainly invest in equity REITs. They are built around an index of a publicly-traded real estate. The minimum investment in REIT ETFs is $3000, the expense ratio is 0.12% and the yield is 4.42%.
REIT ETFs gives investors a wide exposure to the real estate market in their region without having to deal with the challenge of large capital.
If you can’t afford a minimum of $3000 to invest in REIT ETFs, you can try investing in an eREIT. Fundraise is a company that offers an eREIT. With just $500, you can invest in eREITS. The management fee is 0.85% while the advisory fee is 0.15%.
eREITs funds are less liquid because they are not traded publicly.
How to make the most out of your REITs Investment:
1. Take Advantage of the Dividend Reinvestment Plan (DRIP):
If you want to build up a steady reserve of wealth, take advantage of DRIP. This enables you to reinvest your dividends into more units instead of receiving payout out in cash.
You can do this reinvestment monthly or quarterly, as it will make your units to grow faster.
Setting up a DRIP is easy; all you need to do is to ask you discount brokerage to do it for you. You can suspend the DRIP at any time.
2. Set up an Automatic Flow:
To increase your income, you can automatically set up transfer into your investment account daily. This will make it easy for you to save up enough to reinvest. If the funds you have are automatically channeled into your investment account, you won’t be tempted to spend the money on unproductive ventures.
Without a doubt, REITs are one of the best performing passive income investments you can make. The return on investment is high and security is sure.