Want to Invest in Real Estate? Consider REITs

As we continue to mature and focus on our careers, we may start to prioritize building wealth. Many people use retirement accounts and the purchase of stocks and bonds to grow their money over time but there are other ways to build wealth. Another type of investment to look into is real estate. Although there are many different types of real estate investments, one option to consider is real estate investment trusts also known as REITs.

What are REITs? Real Estate Investment Trusts (also known as REITS) are large funds that are full of real estate investments. These investments can be single-family homes, multifamily homes, apartments, or commercial buildings. Just like you can purchase an individual stock from one company, you can also purchase an individual REIT, which is a small share of a company that owns various forms of real estate. I prefer to invest in stocks via index funds and I also prefer to invest in REITs through index funds. A REIT index fund is a large fund full of smaller REITs that are each invested in many different types of real estate. When you invest in REIT index funds you are a partial owner of several different types of real estate investments, just like when you invest in other index funds you are a partial owner of several different types of stocks or bonds.

Why are REITs a good option? REITs are another type of investment option that can help you make a profit on your money, especially the money you have in retirement accounts. Many people use their employer-sponsored 401Ks or IRAs to invest in various types of stocks and bonds. REITs give you a chance to add index funds that are full of real estate deals. Adding real estate to your investment portfolio can make your portfolio more diverse (since you’re adding another investment class), increase your profits (since they have the potential to make you even more money each year), and add increased protection for your investments (since it can shield your money from some of the day-to-day changes and volatility of the stock market).  For example, there may be times when certain stocks and industries lose some of their value, but real estate prices don’t change as often. Regardless of the economy, everyone needs a place to live.

How do REITs compare to other types of real estate? REIT index funds are very large real estate funds full of smaller real estate deals and each of those smaller deals are invested in many different types of real estate. By investing in REIT index funds, you own a small part of hundreds if not thousands of real estate deals. Unlike investing in real estate directly by purchasing homes or buildings alongside other investors or with your own money, when you invest in REITs you are much more removed from the daily operations of the properties. You are not making decisions on which properties to purchase, how to manage/renovate them, or when to sell them. Because you have less responsibility, you make less profit than more direct investors. However, you also have less risk. If one property fails to sell in a timely manner you are not out of hundreds of thousands of dollars. REITs give you a chance to get started in real estate and diversify your portfolio in a safe, less-aggressive, more “hands-off” way.

How do they compare to other types of index funds: REITs are similar to other types of index funds that are full of stocks and bonds. Because they are so similar to these other investments, you can usually add REIT index funds to your retirement accounts or purchase them the same way you purchase other index funds. In terms of investment returns, the percentage return on your profit can vary from year to year, but over a longer span of time, REITs tend to do pretty well. Over the past 5 years, investors who had REITs made over 15% profit on their money, those who invested solely in index funds with stocks made an average of 10% profit of their money. Past performance doesn’t guarantee future returns, but REITs can certainly be a good type of investment to have in your portfolio.

FYI: If you’d like to learn more about REIT index funds check out Vanguard, Fidelity, or other investment institutions. If you’d like to read about individual REIT stocks to consider, check out this article.

4 Things To Do Before You Start Investing In Real Estate

1. Read books to learn the basics. Real estate is a HUGE industry. Not only does it encompass a variety of different niches, but it also includes a myriad of jobs, investment roles, and moving parts. Although the industry itself can be lucrative for many people, it can also be a source of disdain and loss for others. In order to ensure that real estate is the right industry for you (and increase your chances of actually making money instead of losing it), it’s essential that you educate yourself. Learn about the different forms of real estate investing. Study the pros and cons of each type and determine which one would be best for you. If you’d like a more comprehensive guide, you can always check out podcasts and webinars on Bigger Pockets or read books like the ABCs of Real Estate Investing.

2. Start networking to meet people in the industry. Once you’ve become educated on the different types of real estate investments, you should start meeting people. Although you may be very skilled and successful in your own right, real estate is a team sport. As you start to network with others, you’ll learn from their mistakes and achievements which will help you gain more experience. As you continue to interact with people in various settings you’ll gain access lucrative deals and other investments as well. When I started going to real estate meetup groups, I learned about other areas of real estate that I never even considered and got invited to invest into deals I wouldn’t have otherwise known about. Plus, I started to meet people with different skillsets and now have a list of people I can call on for a variety of homes to purchase or sell. I can also find contractors, maintenance men, or interior decorators quicker. In other words, real estate investing is much easier because I’ve met so many different people and groups that have helped increase my chance of success.

3. Listen to podcasts to stay up to date. One of the things that has really helped me over the last few years is podcasts. Although I prefer to learn new information from books and blogs, podcasts are essential for me as well. They reinforce information I may have learned and forgotten from awhile back. They also provide new perspectives on topics and deals that I may not have considered myself. Plus, they help me stay up to date on current information and interview other successful investors which helps me learn from the experiences of others. For example, it was through a podcast that I gained some insight on different ways to invest in real estate without actually getting a mortgage from the bank. It was through podcasts that I learned how other people started investing in single family homes and were then able to scale up to apartment buildings. It was also via podcasts that I learned which type of investments would take more or less of my time and which ones provided more profit in tax-free ways.

4. Join communities to meet other like-minded people. Along with networking with others, reading books, and listening to podcasts, you must do one more thing: surround yourself with like-minded people. It can be very easy to make a goal, but oftentimes it can be difficult to consistently do the work needed to bring those goals into fruition. One of the things that have helped me is joining communities of like-minded people. Whether that’s going to real estate meet up groups or becoming active in online forums, surrounding myself with people who have similar goals and interacting with them consistently has helped create accountability in my life to keep me focused and committed. These communities have also served as a place of inspiration and encouragement to keep me on track. In fact, I’ve had several people that have been gracious enough to hear various ideas of mine and offer their feedback and guidance on what I could do to bring it into fruition, they’ve even connected me to other experts in the field.

My point? If you’re thinking about investing in real estate, it’s essential that you read books to learn the basics, start networking with people in the industry, listen to podcasts to stay up to date and join communities of like-minded people.

The Importance of Networking: Why I Starting Going to Real Estate Meetups

Last year around this time I had a lot on my plate. As a graduating medical student, I was making the finishing touches on my residency application and prepping for the mandatory hospital rotations needed to complete my degree. With all of that going on, I still made it a priority to attend real estate meetups once a month. I went to these groups for 5 main reasons:  

1. I needed to learn new skills. Unlike people who choose to focus on one job or skill for the majority of their lives, I want more. Instead of working a traditional job into my 50s I want to acquire passive income through real estate investing. Acquiring this passive income through real estate allows me to continue building wealth for my family while also providing me with the flexibility I crave, whether that means working part-time to have children or simply creating space for me to pursue less lucrative passion projects. Since I didn’t grow up around real estate investors, I needed to learn some background information and acquire a whole new skill set. Going to these real estate meetups put me in direct contact with people who had these skills that I could learn from.

2. I needed to expand my network. If I ever wanted to achieve my goal of building wealth through real estate, I had to start doing things I’d never done. This meant thinking differently and surrounding myself with people who had already achieved what I was looking to obtain. Along with learning new skills, going to these meetups gave me a way to expand my network so I could interact with real estate investors and emulate people who had already achieved these goals.

3. I needed mentors. My parents didn’t use real estate to build their retirement savings and none of my close family members had the experience needed to guide me through the process. Despite the numerous podcasts I listened to and books I read, I needed more. I still had questions that were unanswered and concepts I wanted clarification on. Going to these meetups were a great solution. They helped me find mentors who could “show me the ropes” build relationships with people who could serve as advisors. Because of these meetups, I met people who volunteered to teach me how to find, evaluate, and finance deals.

4. I needed to change my thinking. Along with mentorship, my outlook on real estate reached a whole new level when I started going to meetups. The people I met at these groups kept me inspired in the midst of doubt. They gave me insight on how to invest in real estate in ways that could increase my monthly cash flow and help me save money on taxes. They also kept me optimistic about my goals and my ability to eventually create wealth. Being around people who were constantly discussing deals and sharing advice on pitfalls to avoid helped me learn more than I ever could have imagined. These meetups changed my view of real estate investing and made me even more committed to my goals.

5. I needed access to deals. The final reason I needed to expand my network was to actually NETWORK. Some of the best real estate deals are ones that take advantage of “leverage” and involve multiple investors. Companies raise money from rich investors and fund lucrative investments as a group. Unfortunately, it’s illegal to advertise these deals to the general public due to their high risk and buy-in costs. The only way to actually find out about these deals is to meet the people who create them or invest in them. Going to meetups played a key role in allowing me to cultivate business relationships with people who could give me access to those deals.

Long story short: the meets-ups help me expand my network. I needed to expand my network to continue to meet potential mentors and surround myself with people who could keep me motivated to reach my goals, safeguard against doubt, and get me to think more like an investor. Lastly, I needed to expand my contacts and cultivate relationships with people who could be potential partners in the future. 

Have you ever gone to a real estate meetup group? If so, what was the experience like for you?

Benefits of Real Estate Investing, Part 2

In addition to helping you purchase assets, increase your net worth, and lower your tax rate, real estate has other benefits as well…

1. You can invest in it using leverage aka “other people’s money.” When you purchase real estate, either as a home to live in, or as an investment property, you don’t have to pay the full cost of it upfront.

   When people buy a home, they usually pay a small percentage of the cost as the “down payment” and then get a loan from the bank (i.e. a mortgage) to cover the rest. This method can be used in the investment world as well.

   For example, you can buy a home to rent out to family members or even buy an entire apartment building in your local city with the help of a loan from the bank. In fact, many investors fund a majority of their real estate deals using other people’s money (whether that’s money from the bank or money from investment groups, private funds, grants from local city governments, or small loans from family and friends).

   Experienced real estate investors raise money for the down payment from other rich people and then get a loan from the bank to cover the rest. By using other people’s money to fund the down payment and securing a loan from the bank to cover the rest, these investors get to own real estate properties even though they didn’t use any of their own money to purchase them. Quite a deal, if you ask me.

   Although they have to pay back these funds eventually, there are several investment strategies (like refinancing) that allow these investors to pay back that money much sooner while still keeping a big profit for themselves. You can do this too.

   Having the ability to use other people’s money to make a decent profit for yourself, and for them, is a pretty sweet deal.

   Investing in the stock market doesn’t really offer this kind of advantage. Banks, private funds, and wealthy businessmen are far more willing to loan you money for a real estate deal than for almost any other kind of investment.

2. You can protect your assets. As you can imagine, the more money you get the more you are going to want to protect it.

   The last thing you want is to get into a car accident or make a costly mistake on your job and have someone sue you for every dollar you’ve ever earned (yes, people do this). Thus, “asset protection” or protecting your net worth from creditors and lawsuits is an area of extreme interest for wealthy people in America. Real estate can be great for that.

   Oftentimes, when people purchase a piece of real estate with the goal of making money from it, they don’t purchase it the way you would normally think.

   Instead of having money in their checking account and simply paying for all or part of it, they set up a protection entity called an LLC. The main goal of setting up an LLC and buying the property through that LLC is that it protects the value of your investments from lawsuits.

   Thus, if someone sues you personally they cannot get any money or value that is within the LLC and if one of the tenets in your property decides to sue to the apartment that is held within the LLC, he or she is not able to get any of your personal money or net worth.

   In other words, the LLC separates your personal money from your investment money, even though you are in charge of both. In fact, many rich people and smart investors set up tons of LLCs.

   For example, they may partially own 20 houses and set up a different LLC for each home. That way, if someone sues them personally or someone sues one of their LLCs, that person cannot get any of the money in any of the other properties.

3. You have the freedom to decide how involved you want to be in the investment. You can invest in real estate “actively” and use it as a job OR you can invest in real estate “passively” in your spare time. You get to decide. It caters to everyone.

   Many of us enjoy our day jobs. We like the work we do and the impact it has on others. However, our jobs often take up a significant portion of our time and don’t leave much room for anything else, especially for those who have a spouse or kids.

   One of the things I love about real estate investing is that once you learn some investment basics, it doesn't have to take up much of your time.

   If you’re the opposite of me and you hate your day job entirely, there are other types of real estate investing that are more active and can be used to completely replace your old job.

   In other words, if you want to quit your job and instead make real estate your career, then you can invest actively. However, if you love your job and just want to use real estate as an additional stream of income then you can invest passively.

   Both types of investments make money, you just have to decide which side you are going to be on.

   Theoretically, the active investors put themselves in a better position to make more money (or use less of their own money in the deals) than the passive investors, but believe me, both types of investors walk away from the investments very happy (provided they found the right deals in the first place).

My point? In addition to things like extra monthly income, lower taxes, and appreciation, real estate offers several other benefits. It gives you the chance to invest using other people’s money which makes it less of a risk and a much lower financial burden for you. Real estate investing also has several entities, like an LLC, which will allow you to protect the money in your investment from lawsuits and creditors. Plus, there are so many different forms of real estate investing that you can choose how involved or uninvolved you want to be in a way that caters to your lifestyle and competing demands.

Tell me, are you considering real estate investing? Which advantage of real estate investing appeals to you most?

Don’t forget to subscribe below to receive the newest content :)

Benefits of Real Estate Investing, Part 1

There are several different investments you can make, but I think real estate is one of the best.

1. It allows you to buy an asset (something that goes up in value). Now I know some of you may be thinking back to the housing market crash of 2008 or the impending downturn many speculators think will happen in 2019, but hear me out.

   Even though the housing market may experience dips here and there, it always recovers. As a whole, houses, apartments, and commercial buildings increase in value over time, even when you factor in inflation.

   In 2009, studies showed that the average cost of a 3 bedroom house in my home state of Florida was around $175,000. Although prices dipped in 2012 to $125,000, they recovered soon afterwards. As of January 2019, the average price for a 3 bedroom home in Florida was around $230,000, an increase of $55,000 from 10 years ago.  

   Since houses increase in value over time, they are a great investment to have. So instead of using your money to buy liabilities like cars, clothes, and phones that decrease in value from year to year, investing in real estate allows you to buy something that increases in value.  

2. It can be used to increase your net worth through “appreciation.” For those new to real estate investing, appreciation is the fancy term used when something increases in worth. When you subtract your debts (student loans, credit card bills, and any bank loans) from your income and assets (things you own) what is left over is deemed your net worth.

   Investing in real estate gives you the chance to further increase your net worth through a principle called appreciation. In general, there are two forms of real estate appreciation, “forced” appreciation and “unforced” appreciation.

   Forced appreciation is when real estate increases in value due to circumstances you can control. Examples of this forced appreciation are when people buy rundown properties and renovate them afterwards (in an effort to increase their value) or when apartments increase the monthly rent (in order to increase their revenues).

   Unforced appreciation, on the other hand, is when real estate increases in value due to circumstances you cannot control. For example, a person may purchase a home and then 5, 10 or 15 years later he or she may realize that the home is worth significantly more than what they originally paid for it.

   Many times, the homeowners didn’t do anything special to cause the value of the home to increase besides pay their mortgage and mind their own business. The value of their home increased simply because more people were looking to buy in their area, the local economy had improved as whole, or the land on which the house was built became more valuable. Either way, the homeowner didn’t have much to do with the appreciation. It occurred do to factors he/she had no control over.

   Thus, whether it’s forced or unforced, as real estate appreciates in value your overall net worth increases as well.

3. Investing in real estate can increase your cash flow. Cash flow is what real estate investors call the money that is deposited in their bank accounts for investing in certain deals. It’s their profit or the money they get to keep after subtracting their expenses from their revenue.

   Since it typically shows up as a check or a direct deposit into one’s bank account, investors call it “cash” and since it happens periodically (every month or quarter) it “flows,” hence the term “cash flow.”

   Real estate investors usually generate cash flow by charging their tenets a monthly rent. After investors collect their rent money, they pay for any expenses or repairs, send a check to the bank to pay the monthly mortgage, and keep whatever is left as their cash flow. This cash flow ends up serving as an extra stream of income to supplement the money they already make from their day jobs. It’s a pretty sweet deal that puts more money in their pocket each month.

4. Investing in real estate can help you save money on taxes. For the most part, any time you sell something, or make money from providing a service or job, you owe the government taxes.

   The government provides several free services and protections we all benefit from (ie. firefighters, police officers, schools, national defense, social programs, etc) so when we make money, we must pay a certain percentage back to government in return.

   Technically speaking, a real estate owner is supposed to pay taxes on the profit or cash flow they collect in rent. However, not many of them do, legally.

   The reason real estate investors don’t pay taxes on this profit is because the government actually wants people to invest in real estate. It understands that citizens need a place to live and housing options can be scarce. Thus, it wants to incentivize its citizens to rent to each other.

   One way it does this is by allowing real estate investors to subtract out any real estate losses from real estate gains. The real estate loss that most investors claim on their tax returns in order to minimize the amount they pay in taxes is something called “depreciation.”

   Depreciation is the real estate concept used to describe the reality that the materials (bricks, windows, pipes, etc) used to make a home or apartment building will wear out over time and need to be replaced.

   Because of this fact, the government allows real estate investors to subtract a percentage of the real estate that “depreciates” or wears out over time from the profit they make. By the time most investors subtract out this “depreciation” they end up reporting a much lower amount in overall profit and this allows them to pay a much lower percentage of taxes than they would have otherwise.

   Plus, many good real estate investors take advantage of other government incentives, in addition to depreciation, that virtually wipe out most of the taxes they would have had to pay. In other words, real estate investors put money into deals, make a profit from those deals, and avoid paying taxes on most, if not all, of that money due to various government incentives in the tax code. If you start investing in real estate, you can begin taking advantage of some of these incentives as well.

My point? Real estate investing offers many benefits. It allows you to purchase something that increases in value and gives you the opportunity to raise your net worth through different types of appreciation. Plus, it can serve as a second stream of income by providing you with monthly cash flow. With the help of a good advisor, it can also make you eligible for government incentives that lower your tax rate.

Now that you know some of these incentives are you willing to give real estate a try? Are you more open to the idea of looking into some real estate deals?

Be sure to subscribe below to receive the newest content.