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Real Estate Investing Through REITs

By Brian Kline | August 1, 2013

It doesn't matter if the real estate market is heading up, down, or sideways. There are always ways to make money in real estate. One way is through professional investors. You can jump in as a landlord if you don't mind dealing with the aggravation of tenant calls in the middle of the night and on Sunday afternoons. Or you can opt for a steady return from real estate investment trusts (REITS).


photo credit: thinkpanama via photopin cc

The year-to-date return for FTSE NAREIT Equity REITs Index is 16.8%. Fixing and flipping investors and sandwich lease option investors can outperform that number but most won't and those that do will put in an enormous effort to do so.

You will want to thoroughly study any REIT before investing. Historically, most REITs have invested in commercial real estate. But today many are moving into residential real estate to take advantage of the deeply discounted prices available on foreclosed houses. More specifically, Fannie Mae and Freddie Mac are offering deep discounts on large block purchases of residential homes. Often thousands of houses per deal.

REITs are Not Stocks

REITs must distribute 90% of annual net income to shareholders. This appeals to investors seeking cash flow from real estate investments rather than buying and holding to profit from appreciation. People in retirement find this to be a good way of generating income from real estate without being a landlord.

One draw back to REITs is that 1031 tax deferrals are not allowed because the properties are not held in the names of individuals. However, people investing through retirement accounts (401k, IRA, etc.) do defer income tax until it is distributed during retirement.

Not All REITs are Publicly Traded

Anyone can invest in a mutual fund owning REITs but not everyone can invest in all REITs. Many are private investment trusts because they don't want the added expense of having to comply with all SEC requirements, which add a second layer of management expenses.

Private REITs are less liquid than publicly trades ones because a willing buyer needs to be matched with a willing seller. For that reason, most, if not all, states regulate these trusts. For instance, California requires investors in these types of trusts to have a net worth of at least $225,000 above basic personal needs such as a house and car. Proving that level of net worth means having cash in a bank, owning a business, or owning other real estate. Another provision in California law is less demanding. It requires that you have an annual income of at least $60,000 and a net worth of at least $60,000. If private REITs interest you, be sure to check out the requirements in your state.


Brian KlineAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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