How to Make Money in Real Estate -- Without the Hassle of Owning Property


Real estate is often a fantastic investment.

Yet it comes with a specific set of headaches.

Finding good tenants isn't easy. Then you have to keep them. You'll have to hire a management company to handle your property. Or handle the drudge work of rent collection and home maintenance.

And we didn't even mention inspections. Permits. Taxes. Code violations. Insurance.

Add it up, and stocks are suddenly looking better.

It doesn't have to be that difficult, however. There's another option with the benefits of real estate without the hassles.

A real estate investment trust (REIT).

REITs have much to offer investors. Historically, they've performed very well relative to other asset classes. They allow you to invest in real estate without screening tenants. Or fielding a late night phone call for a broken water heater.

They're also a great option for those looking to diversify a portfolio.

Let's take a glance at some of the more common varieties of REITs.

Residential REITs

Residential real estate trusts typically own things such as apartments or manufactured housing. You should invest in markets where rents are high. In a city such a New York or San Francisco, the cost of housing creates movement into the rental markets. Destination cities such as these also have a consistent flow of people moving into the area. Occupancy rates tend to stay high -- making these REITs a strong play.

The Millenial generation is primed to rent at historic levels. They are delaying home buying much longer than prior generations. Residential REITs could reap the benefits of this cultural shift.

Retail REITs

Retail REITs involve holdings such as shopping centers or strip malls. REIT ownership is exceedingly common for today's retail developments.

If you're considering an investment in this area, it's important to assess the health of the retail sector in the area. A REIT can't make money without retail tenants. If the market is healthy, you can focus on individual trusts.

Typically, profitable REITs with healthy debt levels are good targets. REITs with ownership of developments with big box retailers and other anchor tenants are also attractive. These tenants offer stability along with income.

Office REITs

These trusts own and operate office buildings and complexes. The model is the same as retail REITs. The trust rents to firms who are locked into longer-term leases. Desirable areas often drive value.

Companies are eager to lease space in thriving business areas. Access to skilled labor is also important. A REIT with holdings in Silicon Valley would typically be a better bet than a REIT with holdings in a depressed Rust Belt city.

Healthcare REITs

Do you want to invest in hospitals, medical offices or retirement homes? This is your option. The aging of our population makes these trusts intriguing. The massive Baby Boom generation is reaching retirement. Health care needs are spiraling. This, in theory, should make healthcare REITs a strong play.

It's not an entirely rosy picture, however. The healthcare industry is tied to programs such as Medicare and Medicaid. Funding shortfalls may adversely affect health providers. REITs in this sector will feel the pain if that occurs.

Now, however, they make a strong investment. Find a REIT with profitable, diversified holdings and invest.

Why REITs make sense

By law, REITs must pass on profits to investors. That means juicy dividends. REIT dividends have recently outpaced S&P 500 dividends by a wide margin.

There is a caveat. Most REIT dividends are taxable, unlike long-term dividends. Yet the high-yield nature of REITs still makes them attractive to investors.

Another hurdle lurks in the form of interest rates. Will the Fed make good on its rate-raising rumblings? Then many REITs may be impacted. REITs that made significant use of borrowed capital are especially at risk.

REITs have performed very well recently. There is some belief that values may be too high. Our long-term, low rate environment may have helped overvalue REITs.

That means it serves investors well to be selective. You may also wish to exercise some patience. An interest rate hike may indeed serve as a corrective. If that happens, lots of bargains will ensue. If you're aiming to build long-term wealth, you can't ask for a better opportunity.

Investing in a REIT doesn't offer the same thrill as buying a beautifully restored rental home.

Yet the possibility of high dividends -- and no dissatisfied tenants -- should be enough to intrigue any investor.

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