Buy Rental Property or a REIT?
Although many individuals prefer rental units as additional income, one of the last things you probably want to do in your retirement is to find renters and deal with the drama that comes from having them rent for you. You have to find tenants with reliable income, continue to provide maintenance and other support for them, and worry about potential problems with non-payment or other issues.
Traditionally, one of the best retirement investment options is a real estate investment trust (REIT). According to Wikipedia:
A REIT or “real estate investment trust” is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.
As opposed to buying rental homes or properties, REITs offer a lot of diversification and are very liquid. It’s easy to sell REIT shares on the stock market and they are usually very stable. On the other hand, houses can be difficult to liquidate and people are finicky, leaving landlords with a lot of potential risk.
Changing Interest Rates Can Affect Reits
Because REITS tend to use a lot of borrowing, when interest rates rise, that can affect REITs and make it not a good time to invest. Currently interest rates are low so REITs have benefited. So how do you know whether now is a good time to make such an investment? The key is whether interest rates will remain low.
Short Lease REITS vs. Long Lease REITS
When leases are short, cash flow can change more quickly, but longer leases create more stable investments. Short lease REITs, like hotels, are usually on one end of the spectrum while longer leases, like health care facilities, are on the other. Somewhere in the middle are multifamily housing, warehouses, and commercial space in malls or department stores. Office space is in high demand, though the yields may be smaller. Office space in cities is easily come by, and usually it doesn’t cost a lot up front. This can make it a good choice when considering REIT investments.
Where are REIT’s Headed Now?
REITs bottomed out in 2009. REITs purchased in late 2009 could be up as much as 60% now. So, while the market continually fluctuates and the economy is not yet as stable as it was before the 2008 recession, REITs can still be a very good investment, offering a good chance to make up for losses incurred in the past.
Currently, REITs may offer a rate of return up to 3 or 4 percent higher than government bonds, which means the additional risks could be offset with extra compensation in yields. Smart investors may find that now is the perfect time to make such investments, banking on the extra percentage paying off nicely in the future. The bottom line is that there is always a certain degree of risk. Right now, it looks like wisely investing in REITs could be a risk that could reward the investor handsomely. There’s a saying that, “it’s always a good time to buy something,” and it looks like now, REITs could be that thing.
About the Author:
Tyler Cook focuses his investment strategies on down-trodden investments, including REITS. He closely follows the real estate investment industry, from CDO residuals to mortgage refinance rates.
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