I’ll be the first one to admit, I don’t know much about REITs. Other than the basics, that is the only information that I have.
I am absolutely not ashamed of admitting it because it is not a primary goal of mine to get a piece of the real estate market without having the physical property itself.
To date, I also invest in the stock market through my retirement account. A 401K account setup with my W-2 position means I am still receiving a company match and gaining the compound interest as I plan to leave that money in there for the long run.
This allows me to turn my attention and focus in learning as much as possible and buying as much real estate as possible.
This is exactly why this article grabbed my attention as I’m struggling to understand the benefit of investing in real estate without owning property.
If you’ve even considered investing in real estate or even currently own real estate (as your primary residence, for example), then it only makes sense to at least look into the benefits and the barrier to entry.
If the above is true, this also tells me you don’t know much about REITs either.
If I’m making the assumption that you are at least involved in investing in the stock market then the goal to diversify into more tangible assets make sense.
If you don’t currently invest in the stock market then, yet again REITs should not be your primary area of concern and education. At this point, I would recommend focusing first on investing money each month into the stock market. After that, you take the risk the rest of your residual income and look to invest in real estate. please note this is the highest level overview without taking your personal situation and circumstances under consideration.
No matter what I hope you and I can agree that the level of education and knowledge that you gain can only help you succeed.
With that the comments made throughout this article, it forces me to think about the assumptions made based upon a common lack of understanding on how to lower your risk when investing in rental real estate.
First let’s talk about the benefits!
Benefits
Remember to consider all the benefits that comes with investing in real estate. Check the below list to name a few:
Cash Flow
Tax benefits
Mortgage paydown
Property value Appreciation
Rental income appreciation
A tool for generational wealth
Also, consider Real Estate as a low barrier of entry depending on how you get involved! You could absolutely do no or low money deals, that just requires time and education. Similarly, becoming a wholesaler or househacking is another great option to get involved!
This merely starts the journey as a real estate investor.
Areas I’d like to Comment
“But buying physical properties also means having to pay to maintain them, not to mention bearing the risks that come with relying on rental income.”
Maintaining physical properties is perfectly fine. Especially when you pay for a property manager that takes care of all of the maintenance and repairs. Remember all of the previously aforementioned benefits of real estate investing. One of which is your ability to select which real estate investment you’d like to partake in. If the numbers don’t make sense then you walk away from that deal. The numbers, are defined with your cash flow analysis. Your goal is to include repairs, capital expenditure, and vacancy expenses as part of your monthly cash flow analysis. you are essentially maintaining a reserve account from the excess rental income (after paying your mortgage), for when not if repairs occur. A slight modification in your mindset means that you know maintenance will occur and you will have money for it.
Relying on rental income is where I’m stuck. Currently you have a main source of income. That should continue to be your main source of income until you’ve reached a point of Financial Security and freedom that allows you to then rely on your rental income. Mind you, depending upon your lifestyle and your current expenses, your portfolio may need to be upwards of five, ten, fifty, or even one hundred plus properties in order for you to rely on your rental portfolio income. The wonderful news is that this all depends on you!
“You never know when a property of yours might sit vacant for months on end if rental demand drops locally. Or you might have a tenant who trashes your home, leaving you on the hook for repairs.”
We’ve discussed the repairs now have you review the previous response above. Repairs are calculated in our cash flow analysis before even purchasing the house. When discussing a tenant who trashes your home and you are forced to pay for the turnover costs. Consider this, your property manager want a great tenant. Their costs, stress and the chance of losing you increase dramatically when there is a bad tenant. Your property manager will screen the tenant to reduce the chance of a tenant trashing your place. Let’s say the tenant still after what I just mentioned trash is your place, then this is where we discuss your reserves, your emergency fund, and your ability to access cash flow from your primary and come along with your other rental properties in your portfolio. The downside of a tenant trashing your place is nowhere near close enough to the benefit of owning rental real estate!
As far as they can see ghosts, not only are we including a reserve fund 4 vacancy each month we receive rental income, but also when you are in the process of doing your cash flow analysis you are connecting with your property management company along with your real estate agent to ensure there is and will continue to be demand for the property. Even if there is a vacancy, then you would reduce the rental amount would charge. This is perfectly fine because real estate investing is a long-term game. You may need to reduce the amount now, however, in time renewing a lease with a current tenant will increase the amount and the market value for what a rental property will command will increase through rental price appreciation!
“There are liquidity issues to consider as well. Tying up money in a physical property could mean running into a financial crunch or missing out on other investing opportunities.”
Consider investing in real estate in different ways. If you follow a BRRR model where you leave little to no money in the deal, then you won’t have liquidity issues to consider. This is the strategy we focus on to grow our real estate investing portfolio in Baltimore City, Maryland. Also consider the equity game. This is money that you will be able to tap into eventually through a HELOC or Cash-Out Refinance. This is money you would not have had before should you not have decided to invest in real estate
This was obviously a quick article to highlight some key points on REITs. my goal is solely to elaborate on certain points to ensure that the education and knowledge continues to spread and you can see the positives in rental real estate investing!
Read the full article here: https://www.fool.com/real-estate/2022/01/29/how-to-invest-in-real-estate-without-owning-a-sing/
