Real Estate Without The Headache: How To Use REITs To Supplement Your Annual Income

Investing In Real Estate Has Never Been Easier

A REIT stands for "Real Estate Investment Trust" and they allow you to invest in real estate without having to be a landlord, without having to deal with tenants, without having to go hunting for properties, and without having to take on a massive mortgage.

It’s as if real estate and the stock market got together and had a baby. 

2 Main Types of REITs

Equity REITs

About 80-90% of REITs trading on the market are equity REITs and are the most popular by far. They invest in hard real estate assets and their revenues are mainly generated from rental income from the properties in their portfolio.

Mortgage REITs

As their name suggests, they invest in mortgages giving you (the investor) partial ownership in a mortgage. They make up less than 10% of the REIT market and generate their revenues from the interest made on those loans.

Note: there are some REITs that offer a hybrid of both Equity and Mortgage but it’s not as common and you will usually find that the majority are one or the other.

Listing Of REITs By Property Type

There’s such a wide variety of real estate properties you can own as an investor for example, you can invest in:

• Post offices
• Movie theaters
• Driving ranges
• Self-storage
• Casino’s
• Health care facilities
• Retirement homes
• Prisons (yes… you can make money off prisons)

The list goes on and on.

The image below gives a detailed timeline for when each type of REIT listing was available to investors. It's interesting to see the different kinds of property types we can invest in from the comfort of our own homes.

Source

(https://www.reit.com/what-reit/history-reits)

What Are The Responsibilities of a REIT?

REITs are responsible for acquiring, managing, building, renovating, and selling real estate. The best part? You don’t have to do any of it. You don’t have to manage the property like a landlord would. But you do get the benefit of collecting the rental income from the properties they own. And that rental income is paid in the form of a dividend.

It may be monthly or quarterly depending on the REIT payout structure, but either way when you own REITs you get to sit back and relax while you collect your rental income for doing absolutely zero work.

REIT Requirements

A requirement for a company to be considered a REIT is that it must payout at least 90% of its earnings to shareholders.

A few other REIT requirements (by law) to keep in mind:

• Must be managed by a board of directors or trustees
• Must have a minimum of 100 shareholders after its first year as a REIT
• Must invest at least 75% of its total assets in real estate and cash
• Generate at least 75% of its gross income from real estate or related sources such as rental income or interest on mortgages

What You’re Getting When Buying REITs

What I personally find fantastic about REITs is that when you buy just 1 share you could be a part owner in thousands of different properties. These properties could be anything from residential buildings, to retirement homes, to self-storage buildings and so on. The best part is that you can do this from your smartphone and the comfort of your own home.

PROS 

• It’s so easy to become a partial owner of some of the biggest real estate corporations in the world and earn a share of their rental income. Just buy and wait for your money to roll in. It’s that simple!
• A great way to supplement your income slowly over time. Unless you have tons of money to begin with, the dividend income won’t necessarily replace your salary, but if you stay consistent and reinvest all of your dividends it can be a great supplement.
• If you want a tax break and you live in the USA, buy REITs in a Roth IRA so you don’t have to pay tax on any of the income you earn. If you live in Canada and buy Canadian REITs, your dividends will be tax-free if held within a TFSA (Tax-Free Savings Account). If you’re Canadian and want to buy U.S. REITs, make sure you purchase them in an RRSP (Registered Retirement Savings Plan) to bypass the non-resident withholding tax you’d otherwise have to pay in a TFSA.
• The liquidity of REITs is also another massive benefit. Unlike holding a physical piece of property, REITs can be bought and sold on the stock exchange in a fraction of a second.
• Easy to diversify. You can diversify your portfolio by purchasing REITs in different sectors to minimize your concentration risk. There’s always a chance that one type of REIT can be impacted depending on what the market is doing. So it’s important to buy REITs that hold different properties to ensure you’re not putting all of your eggs in one basket.
• The majority of REITs offer a much higher dividend yield than many other “classic” dividend stocks giving you a larger bang for your buck.
• The potential for capital appreciation. A REITs stock price can also rise over time giving you both the opportunity to earn income and experience capital gains.

CONS

• One of the biggest cons of REITs is that you’re stuck paying tax on the income you earn at your marginal rate depending on which account you hold them in.
• REITs can be sensitive to fluctuating interest rates especially as they rise.
• As a result of REITs distributing the majority of their earnings out to shareholders, this doesn’t leave a lot of cash to reinvest back into the business which may be detrimental in the long run.
• You may need to buy multiple types of REITs to diversify as most REITs hold properties that are concentrated into one specific sector or industry.
• You have essentially no control over how the REIT is managed or what type of properties the REIT buys leaving you at the mercy of the management of the company.

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