Investing in real estate is a great way to grow wealth over time. It’s also a great way to diversify your portfolio. But if you want to know the secret to investing in real estate the easy way, it’s to not actually buy real estate.
Yes, you read that correctly.
Don’t get me wrong — there’s plenty of money to be made buying homes and renting them out, whether on a short-term basis or a long-term one. Similarly, you can make a decent amount of money flipping houses, especially if you know what you’re doing and are able to handle a lot of those renovations yourself.
But ultimately, the beauty of real estate investing is that it allows you to enjoy passive income. And if you want to really capitalize on that, there’s one approach to real estate investing worth taking.
Load up on REITs
Investing in companies that make money from real estate is a great way to experience the beauty of passive income. And that way, you’re not running the risks that come with owning or rehabbing properties yourself.
Say you decide to buy an income property that you rent out for many years. There’s a good chance it will appreciate in value over time, and if you choose the right rental market, you may not have any problem securing a steady stream of tenants.
But what if that home ends up needing countless repairs through the years, and its property tax bill keeps on rising? You may not be able to keep raising rent to cover your costs.
Similarly, say you decide to flip a house, only your renovations wind up costing a lot more money than anticipated. Suddenly, you’re cutting your profit margins — or risking not turning a profit at all.
That’s why REITs may be a better option for you. Short for real estate investment trusts, these companies own and operate different properties and derive revenue from the leases they sign with their own tenants.
There are different REIT sectors you can look at dabbling in. Industrial REITs, for example, operate warehouses and fulfillment centers, while residential REITs operate apartment buildings or housing complexes. But ultimately, when you go out and invest in REITs, what you’re doing is buying shares of a company that’s assuming the risk of owning and managing physical property so you don’t have to.
Another advantage of owning REITs? They’re required to pay at least 90% of their income out to shareholders as dividends. That means you get to make money two ways — first, via share price appreciation, and secondly, via those steady dividend payments.
In fact, because of the way they’re structured, REITs commonly pay higher dividends than your average stock. And that’s passive income at its core.
Take the right approach
There are different steps you can take to get into real estate investing. But if you want to limit your risks without limiting your upside, then it pays to look at putting different REITs in your portfolio.