The skyrocketing housing costs of the past year have created a huge jump in unmet demand. There are hundreds of thousands of would-be buyers who have saved up for a down payment only to realize that it’s still not enough, or that they can’t compete with all-cash offers. So there they are, with a good chunk of change and nowhere to buy.
Amongst those would-be buyers are would-be real estate investors who have another option available: investing in real estate without buying property. Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. They pool the resources of many investors who then receive dividends from their investment without ever having to buy anything. A lot of REITs are publicly traded and investors can buy and sell shares in them, just like stocks. It’s the easiest way someone can invest in real estate, and currently there are approximately 87 million people in the US who have invested in REITs through their retirement plans and other investment funds.
REITs tend to have a specific focus of the types of properties they hold. There are also diversified REITs that may hold different types of properties. These can include apartment complexes, single-family homes, retail centers, office space, data centers, healthcare facilities, hotels, office buildings, self-storage, and warehouses. The main advantage of an REIT is that you are able to buy into one at any dollar amount you like. Also, because your investment is tied into real estate, your dividends will be based in part on what the properties are renting for, and rents tend to increase more quickly than inflation.
There are, however, some drawbacks to investing in REITs. When contemplating which type of REIT to buy, be certain to find out which types of properties they’re investing in. About 80 percent of REITs hold commercial and industrial real estate, including offices and shopping centers, which have taken a hard hit during the pandemic. Also, the correlation between rising rents and an REIT’s profits isn’t always a straight line. A lot of REITs are very sensitive to interest rates, because many REITs also hold mortgages on real property.
Most experts recommend investing in REITs as part of a diverse portfolio. If your game plan is to still eventually buy property, that’s wise advice. REITs are a good way to capture the rising profits in real estate without a lot of risk exposure, but you need to know what types of real estate you’re investing in. Also, if you’re shoring up resources to save for a down payment, it’s risky to store your money in fluctuating assets. If home prices were to suddenly drop, so would your ability to finally buy your own house. There’s opportunity with REITs, just make sure to do your homework first.