- REITs are Real Estate Investment Trusts
- Real estate is the most popular alternative investment
- Being a good landlord can be profitable
Looking to be a good landlord and rent out properties for income? As a retiree in the US, there are many investment options like the IRA, 401(k), and pension plans that can earn you a good passive income. Among these many options, real estate investment is one of the best investments for you because of its potential for even higher returns through capital appreciation.
As a real estate investor, you can leverage the benefits of Real Estate Investment Trusts (REITs). Aside from the potential for total investment returns, REITs offer you greater diversification of investment. They also allow you to be a landlord without owning or managing a physical property, thereby mitigating property investment risks.
In this article, you’ll find out the easy way to become a landlord in the US as a retiree. And, even if you are not yet retired, this investment opportunity can help you plan for your golden years.
Real Estate Investment Trusts (REITs) are companies that own and operate or finance income-producing real estate. REITs provide Americans with the opportunity to invest in mutual funds and profitable real estate which allow them to access dividend-based income and total returns.
Similar to investing in any other industry, REITs allow you to invest in portfolios of real estate assets through the purchase of individual company stock. You can also invest through a mutual fund or Exchange-traded Funds (ETFs). You can even use your Self Directed IRA.
The company undertakes the investment responsibilities and gives the investors a share of the income produced. By so doing, REITs save investors the stress of buying, financing, or operating property.
REITs invest in a wide range of real estate properties, such as apartment buildings, offices, warehouses, hotels and infrastructure, retail centers, data centers, and medical facilities. While most REITs center on a particular property type, some hold multiple types of properties in their portfolios.
Aside from income from rented space or sales of property, REITs largely depend on external capital sources. Publicly traded REITs collect funds via an initial public offering (IPO) and use them to buy, develop and manage real estate assets.
There is a similarity in the way an IPO and other stock offerings work. The difference is that instead of purchasing stock of a single company, the shareholder owns a fraction of a managed pool of real estate.
The means of generating income are through leasing, renting, or selling the properties. The dividends are equally distributed among the shareholders regularly as a percentage of paid-out taxable income.
REITs work with a board of directors who are real estate professionals in the field and are elected by the shareholders. The board of directors handles the day-to-day management of the company. They select the REIT’s investments and hire the management team.
There are different methods for measuring REITs’ earnings, but a more preferred method is the funds from operations (FFO). The FFO measures a REIT’s operating cash flow, generated by its properties and financing costs.
The generally accepted accounting principles for calculating net income assume that the value of assets depreciates with time. However, the case is different with real estate which retains an increase in value, and it is for this purpose that the FFO was adopted. FFO excludes depreciation costs while calculating the net income.
Nonetheless, the FFO is not entirely reliable, so investors must go through the company’s quarterly report, and any supplemental disclosures to arrive at a more accurate figure.
Generally, REIT shareholders enjoy a host of privileges such as:
- Regular, significant dividend yields: REITs have a history of steady dividend yields through capital appreciation and can mean good cash flow for the investors.
- Long-Term Performance: REITs also provide long-term total returns just as other stocks.
- Liquidity: Just like most trade on a public exchange, REITs are easy to buy and sell – an element that addresses the problem of real estate.
- Diversification of Portfolio: Investing in real estate through REITs offers a low correlation with other stocks and bonds.
- Transparency: The availability of more than one measure for REIT’s financial situation makes it largely reliable. Also the involvement of financial analysts and auditors, independent directors can ensure transparency in its operations.
However, REIT’s offer retirees some specific advantages, they include:
Investment in real estate comes with risks, maintenance costs, property taxes, etc. But, with REITs, you do not own or manage a physical property, this means reduced tax and risk.
Furthermore, stock market activity does not affect REIT values, so buying REITs is a safe investment that lets you enjoy financial freedom during your golden years.
Steady income-generating investments are the best for retirees. REITs pay regular dividend income and this makes them an ideal retirement investment. Also, they pay higher dividends than stock as a result of paying investors 90% minimum of their taxable income.
Work with demographic information
You should consider demographic factors such as population and employment growth, and the level of economic activity of the specific area or industry.
These factors may have a direct impact on rent levels and occupancy rates — which in turn affect cash flow and dividends. Which may affect your ability to be a good landlord.
Also, even though the past might not entirely predict the future, you analyze past dividend payments before investing in REITs. Don’t be carried away by high yields, they might just be non-recurring profits. For instance, the REIT may be selling off properties to generate income, and it’s barely a good signal.
REITs offer both current income and long-term appreciation. Compensation based on the value of the REIT’s assets may require the management to invest in more properties for capital appreciation. For dividends or current earnings, the management may want to increase dividend yield at the expense of long-term appreciation.
You can assess the compensation method for the REIT management and shareholders to make a decision.
One more key step to take is to ensure that management has a personal stake in the company before investing. This information should reflect in their most current prospectus.
Investing in real estate investment trusts is important both for retirees and retirement savers who desire a continuous income flow. With REITs, you can be a good landlord and have as much as a total return on your property investment.