digest
Introduction
all right what's up guys it's humphrey so with home prices soaring and reaching all-time highs since the pandemic and with bidding wars even cropping up in almost every single state with many homes going over their list price the question then becomes how can we invest in real estate if we don't have the money to put down a down payment on a house well in today's video we're going to be answering exactly that question and that is actually that you can invest in real estate as a way to diversify your portfolio and capture dividend income through reits also known as real estate investment trusts congress actually established reits in 1960 as a method to allow investors to buy shares in commercial real estate portfolios a practice that was previously only available to wealthier individuals through large financial institutions since reits have been around since the 1960s they've actually become increasingly popular as an investment in any portfolio and today what we're going to do is we're going to go over what a reit is the benefits and risks of reits and we'll also go over what to look for in a reit when it comes to adding it into your portfolio now since we gained 500 subs since the last video that i recorded i actually have my sub jar right here and 20 and i wanted to shout out the commenter storm surge so this 20 is for you and right now our jar stands at up to 140 and as a reminder guys i put twenty dollars in this jar every time i get 500 subs and i shout you guys out now when this jar hits a thousand you actually get to choose what i invest in and that's pretty dangerous so if you appreciate that type of content this type of content make sure to subscribe it's free and you can always change your mind all right so let's get right into it
What are REITs?
so what are reits a real estate investment trust is a company that owns a portfolio of commercial real estate these are just usually traded on the market so that means you can buy shares of them just like buying a stock in a company so you can buy shares of a reit and that entitles you to ownership benefits and one of the benefits is actually dividend-based income this is super powerful because reits are required to pay 90 of their income back to shareholders aka you as dividends so owning a reit also means that you don't need to own any physical type of real estate you can just buy shares of the reit on the market and you get exposure to the popular real estate asset class this my friends is exactly how you can own real estate without having a crazy amount of money that you would typically need for a down payment on a physical property the income generated from reits is usually very reliable as well and that's because the property that a reit typically owns is commercial and those tenants are usually signing long-term leases think about your local mall the real estate of that mall is in some cases owned by our reits and a lot of those properties within that mall will have multi-year leases for example this is some footage i took at the stanford shopping center here in palo alto and this is a simon property group mall simon property group is a reit so they own real estate here at the small and lease out every single retail space you see here to their tenants now this is no secret if you browse at the simon property group website you'll likely find a mall close to your location in the united states that's owned by the simon property group but besides simon property group which is a retail reit there are a lot of other reits that invest in a whole bunch of other different sectors for example there are hotel roots which just own hotels senior housing reits self storage reits healthcare reits and the list goes on if you'd like a full list of reits you can just navigate over to reit.com which has an extensive directory of all the reits that are publicly traded and not only that this is a great resource to learn about reit investing it's a web page for the national association of reits so when you're done with this video you can also check out that resource which i'll have linked for you in the description below okay so now that we know what a reit is and what it does let's talk about some of the benefits and risks of investing in reits
Benefits of REITs
starting with the benefits the first is that reits offer dividend-based income in fact that's probably the number one reason you would probably want to own a reit is because of the consistent income you receive reits are legally required to pay out 90 of their pre-tax income as dividend to their shareholders that means if you're holding a reit you're getting dividend income every single quarter back to using our example of simon property group they offer a 4.34 dividend yield which means that for every thousand dollars you have invested in spg you can expect about 43 dollars back as a dividend yearly according to research the average dividend yield paid by stocks in the s p 500 is 1.9 now in contrast the average equity reit which owns properties pays about five percent some reits even pay higher dividend yields and that's because a reit if it qualifies as reit does not need to pay corporate taxes and thus why they're able to pay out dividends at such a high rate the second benefit of owning a reit is that you don't need a lot of capital so all you really need to have in terms of monetary requirements is enough cash to buy that share of that reit in the case of simon property group it usually trades between 125 and 150 dollars per share and other reits can cost a lot less for example ticker symbol o and that's the ticker just o trades for around 70 at the time of this recording now of course with the advent of fractional shares from popular trading sites like robin hood and fidelity you can also just buy fractions of a reit for as little as one dollar or even 10 dollars now if you're interested in fractional shares i have a few affiliate links in the description below where you can get a free stock from some of these brokerages that actually offer fractional shares so if you'd like to support the channel just use those below another benefit of buying a reit is that you're naturally diversifying your portfolio as well so when it comes to an average investing portfolio sometimes it can get a little bit too concentrated in singular stocks and etfs by having real estate in your portfolio you diversify into another asset class that is traditionally reserved just for those with a lot of capital so that's another benefit as well another great benefit of owning a reit is that it offers a ton of liquidity so if you invested 200k into a down payment of a home well if you wanted that 200k immediately it would take you a while to get access to that cash with reits if you invest in it and you decide that you need that money all of a sudden well you now have access to a market of many buyers and sellers that are willing to purchase those shares of that reit that you own so unlike physical real estate it's extremely liquid and you don't really need to tie up a bunch of money those are some of the benefits but now let's cover the risks and the cons of investing in reits because it's not always going to be so glamorous in fact it's best to know the pitfalls of reits because that way we're going to be able to set our expectations accordingly when investing in them
Risks of REITs
the first risk is that there are property specific risks depending on the reit that you invest in for example if you invested in a hotel reit well these are going to be way more sensitive to recessions and other economic weaknesses this past year is a really great example of that with the pandemic occurring a lot of hotel reits got hit hard and probably a lot harder than say a health care reit you can see that evidenced here with the zenya hotels reit ticker symbol xhr which tanked heavily during the pandemic and stays at a depressed level for most of 2020 versus ticker symbol mpw which is a healthcare facilities reach you can see that it takes a hit in that same period in 2020 but it recovers quickly during the same time period the second risk and downfall of reits are dividend taxations read dividends generally don't meet the irs definition of qualified dividends since they're being paid quarterly which means that your read dividend income could actually be taxed at ordinary income rates the one exception here is that if you hold your reit in a roth ira or a 401k where you will not be taxed or you have tax advantages when it comes to those re-dividends that is one of the exceptions that you can do when you own reits now if you guys have watched my channel you should know that in any roth ira all dividends and gains are actually completely tax-free it's one of the best accounts to set up for your retirement so i'll make sure to link some of those resources on roth iras in the video description below so basically you can negate the risk of dividend taxation of reits through these tax advantage accounts otherwise you're going to be stuck paying ordinary income rates on your re re-dividends which can be upwards of 24 to 37 percent another risk of owning reits is that the appreciation might be limited and that's true of any dividend paying stock but especially true of reits because reits pay back such a large percentage of their income back to their shareholders consequently they're just not going to be growing as much the last downside is market risk so reits are not impervious to market risk as well if we take a look at the simon property group stock price for the entire time it's been in existence we'll see that in 2008 there was a huge dip due to the housing recession and again last year in march of 2020 when the pandemic started okay so there are a lot of risks and benefits to owning a reit
How to Analyze REITs
let's say you're actually interested in owning a reit well how do you analyze and pick one and here's what you can do in my opinion first you want to look for wreaths that have been around for a long time that have consistently grown their funds from operations for a long time that have good managers with track records there are a lot of same principles that you would look at when it comes to owning a good stock that you can apply to reits as well so reits have specific metrics that you can research to gauge the profitability of that reit and those metrics include number one fund from operations so ffo and net operating income you can also look at occupancy levels and the rent per square foot here's an example of the simon property group press release website you can actually see here that they'll list their ffo their net operating income as well as their occupancy and rent per square foot rates if you look at enough of these press releases from different reits you'll be able to get context for how to compare and contrast different reits in the category that you're looking for now admittedly that's a bit too time consuming for me personally and if i'm looking to invest in a reit what i would rather do is just invest in a reit etf you guys may know that an etf invests in a lot of different stocks so instead of picking one reits you can just invest in the reach etf that invests in hundreds of different reits thereby increasing your diversification so an example of this is actually ticker symbol vnq and that's an example by vanguard they own 174 different publicly traded reits and real estate related investments by buying a reads etf like this one or any other reit etf you're getting exposure to multiple reits and diversifying your risk quite a bit now overall i think reits are best as a long-term investment because there will be a lot of factors that influence a reit's price over the short term such as interest rate hikes and different economic sectors that can be influenced again back to our simon property group example earlier if you were to sell in either 2008 or 2020 you would have incurred huge losses and some of those investors may not be able to handle that type of volatility especially if you're just holding on to it for a short period of time so therefore if you guys do have a really long term time horizon when it comes to reits you're going to be a lot better off because you're not going to be so worried about the day-to-day volatility and the day-to-day price changes of that reit not only that if you're holding a reit for a really long time those dividends are going to be reinvested and compounding and working for you in the right way so to sum up reinvesting is great for the long-term investor who is looking for mostly dividend income and reinvesting is generally best done in a tax advantaged account so is a read actually better than owning physical real estate well that's debatable some people really enjoy the benefits that physical real estate offers them which includes building equity in a tangible asset that they can see by owning physical real estate you also get to take advantage of different types of tax advantages so you can depreciate your real estate you can take mortgage interest tax deductions and you have access to 1031 exchanges reits really shine when it comes to offering low capital costs low time commitments and a ton of liquidity versus physical real estate just doesn't have any of those things so if you're looking to invest in real estate with as little as 10 100 or even a thousand dollars you can accomplish and do that with reits okay guys i'm gonna leave some resources below for you guys in case you want to read more about reits i hope you enjoyed this video remember to like the video and subscribe to my channel for more videos from me in the future lastly thanks to the patreon family who continues to support me i'll catch you guys in the next video which will hopefully be in a few days here i'm going to try to get on a more consistent upload schedule all right peace