Before you ask that question, you should ask, “Should I invest in a REIT.” Or maybe, “What is a REIT?” Let’s tackle that question first.
What is a REIT?
A Real Estate Investment Trust is a type of company that does most of its business in real estate. My acronym for it is Real Estate lIghT. In fact, it has to distribute 90% of its income to its shareholders. When a company meets certain SEC rules, then it can be listed on stock exchanges. As an investor, you can then purchase shares in the company like other listed companies. A REIT is a little like bridging the gap between the investor vetting each deal themselves and simply purchasing a share in a company. Each REIT will have a certain type of business, such as lending, owning, managing, and more.
Should I Invest in a REIT?
REITs are set up to be hands-off for investors. The benefits of investing in a REIT are:
- Work. You don’t have to do any work with the deals. In fact, you can’t. You are a silent investor and get to sit on your private beach and watch the stock ticker.
- Liquidity. It’s easy to buy and sell shares in REITs. There are generally buyers ready for the right price. Physical real estate doesn’t have this kind of liquidity. Not even close.
- Cost of entry. It’s easy to get into REITs. You can buy shares for the share price and get involved right away for less than $100.
- Risk. Your risk is limited to the amount you invest, no more. Shareholders have almost no civil liability for the operations of the company.
REITs have downsides. They are:
- Control. You have almost zero control over the company. The leadership could be running the thing into the ground and there would be nothing you could do about it, except sell your shares.
- Learning. When investing in a REIT, you get almost no education about how the company is doing its business. You won’t learn about how to invest in real estate with a REIT.
- Fees. Stocks have fees, which go to the brokers. This isn’t inherently bad, but when the fees are very high, it is. When in the stock market, you shoot for average growth in the long term (see #4). Fees cut into this.
- Upside. REITs have performed recently slightly better than average in the stock market. If you diversify, as your stock broker will tell you to do, your best hope is to get around or a little higher than average.
How Do I Invest in a REIT?
Perhaps you are ready to take the plunge and get some money working for you. Good decision. I do think there are plenty of better ways to invest in real estate than REITs but it might be a good way to get your feet wet for a little while and find a place to park your money until ready to invest.
As long as the REIT is listed on a major stock exchange, you’ll need to find a stock broker. Broker’s offices are littered along the streets in your town, or you can go to an online brokerage like TDAmeritrade or Robinhood. Please don’t take these as endorsements. I don’t know if they are any good or not.
My last bit of advice: Take the time to research the REIT just like you would with any other stock. It is easy to randomly pick one you like, then lose a bunch of money and not know why. But, that’s the stock market for you.