Daddy Financials

For those us who don't have the cash or cojones to invest in physical real estate, myself included, REITs or Real Estate Investment Trusts are available and ready to serve us.

What are the differences between putting your money into a REIT and going out and buying a home, renting it out/flipping and trying to make a profit? It's simple, risk and an actual physical home.

REITs are like stocks or mutual funds; you can't live in them if you lose your current situation but the bank also cannot foreclose on your REIT because you can't make the payments anymore. An REIT is just a corporation that invests in real estate, but distributes about 90% of their income in the form of dividends. REITs offer nice dividend yields and some are not even very expensive. If you have a Sharebuilder account, you can buy the share in small increments. The more cost effective way might be to use ZECCO and avoid trading fees altogether. You also get the benefit of flexibility with this type of investment. If your house is in dire need of repairs and is costing you money every month, it may still take you 3-4 to sell this money sucker, not so with an REIT. They are easier to unload than a house and won't cost you 7% of the selling price (Agent fees) just for getting rid of it.

REITs are nice way to take advantage of big booms in the real estate market without taking on the risk of mortgage payments, unscrupulous tenants, rising tax rates, etc. Of course with less risk comes less reward. A home can go up in value ten fold given the right market conditions, which would give you a nice hefty sum of money right into your pocket. This won't happen with a Real Estate Investment Trust. You can, however, rack up nice dividends yields, capital appreciation, and have a nice stable investment as part of your overall portfolio.

As with all mutual funds, their are expense ratios with REITs so look over this before you decide to take the jump into this segment of the market. I personally like REIT as part of a balanced portfolio, until I have the capital to get into the real estate market, they provide a nice alternative. If someone offered you truck and said go out and drive this truck, make some deliveries and you can make $150K this year, just pay for all the maintenance on the truck and you can't hire anyone else to drive it. You know nothing about trucks or how to maintain them so you turn down the offer. If that same guy/girl comes up to you and asks you to invest X amount of dollars in his trucking company and you will get a nice quarterly check for 5% of the amount you put in for as long as your money is invested, would you do it? These are not real world numbers but I'm just trying to make a point people :)

By that same token, if you are a hands on kind of person and can handle the risk that comes with the market, then you can make a great deal of money in physical real estate. If your flipping properties, study the market conditions before you buy a fixer upper, not after. Just because your good at construction does not mean you can fix anything and sell it. If nothing in the area is selling for market price, you can lose your shirt very quickly. But if you are lucky enough to be in a sellers market, you can easily make $100K/property if you play your cards right. If you don't want to flip, you can buy properties and rent them out to tenants and get yourself a nice monthly cash flow. This can be risky as tenants can up and leave whenever they please without notice, they can also stop paying rent which means you have to go through the eviction process which can take weeks....and the mortgage payment is still due. But again, if you can rent three houses for even $100 above what the monthly payments to the bank are, that's $300/month positive cash flow for as long as that tenants stays, and you can raise the rent every time they sign a new lease. Study the market conditions before you go this route. Real Estate markets can be very finicky, just like the stock market, and even good research can't always predict what will happen for the next month. There are other options such as hiring a management company, contractors, and landscapers to handle all repairs and tenants in the house and all the minor headaches that pop up, all you supply is the cash.

In conclusion, REITs let you get your foot in the door of the real estate market with limited risk (you can lose only what you invest), more flexibility and generally less hassle than physical real estate. You can make a lot more money investing in physical estate, but you take on a lot more risk. I think REITs are a nice way to start until you get a better idea of what your doing, then take the plunge and get into the market with both eyes wide open.

Thanks for reading

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