Are REITs better than buying a home?

Is owning a home your dream?

If so…you’re not alone. It seems like being a holder of property is high on the list of desires of the American public. There’s an enormous industry built around getting people their own homes and into giant mortgages. Since the housing market implosion in 2008-09, though, people are starting to get a bit wary…the new American dream might just be a sweet rental in the middle of the urban sprawl.

There are many reasons why people want to own their own home. They want the comfort and safety that a house brings and often view it as a safe investment that will bring them an excellent return on their money.

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While there’s certainly value derived from owning your own house – one that is hard to put a number on – we can tell you that a house is really not a great investment…or an investment at all, really. The definition of an investment is an asset that is bought in order to generate income or in the hopes that it will appreciate. If you’re buying a house that you then live in, then there’s obviously no income generated. And if you expect a house to appreciate in value over the long-term…then you may just be in for a rude awakening.

Over the last 100 years, U.S. house prices have increased by 0.1% per year after inflation. So basically, not a whole lot. $100 would only be worth $110.51 after 100 years of 0.1% growth. Now consider that we haven’t even started to take maintenance costs and taxes into account, and that the average homeowner owns their house for a mere 7 years and you see that you’re fighting an uphill battle.

REITs

You know how some people are paranoid of the “system” and choose to hide their money in their mattress? That’s kind of what buying a house is like. It’s…a giant mattress that you can store your money in. Or you know, you could just use a bank. Whatever.

Let’s face it, owning a home is a hassle that for some reason people are jumping through hoops to put themselves through. A home comes with endless financial and personal demands that take time and focus away from your other goals and obligations. But we get why people are drawn towards it. It’s easier to buy a house than it is to become an expert on the stock market.

So what can you do?

Well, if you really want to invest in real estate there are other options. Real Estate Investment Trusts or REITs. It’s profitable for many investors. It’s simply a way to invest in the real estate market without having to actually buy any property.

REITs typically own different types of commercial real estate, you know, stuff like apartment buildings, condos, or hospitals. They pool these properties and/or mortgages together and offer investors a way to participate in the returns achieved by profitable real estate properties. REITs are their own asset class and all together worth more than $400 billion.

What’s awesome about REITs is that they tend to pay out a lot in the form of dividends. This is because the IRS requires these companies to pay out at least 90% of their incomes to shareholders.

So are REITs a better investment? Let’s take a look.

The advantages of investing in REITs

1. Lower entry costs

There’s a much lower barrier to entry to investing in a REIT than buying a home. Even at extremely favorable rates, you’re spending tens of thousands of dollars in the form of a down payment. Only have $500 saved up? No problem. Investing in REITs is like investing in any other mutual fund or stock: invest a few hundred dollars to start and keep adding to it as time goes on.

2. No maintenance costs

You can’t break a window or damage the paint on a REIT. In fact we are so confident in that statement we dare you to try it.

If you buy a home, you will have to spend a lot of time and money on repairs, maintenance, and re-modeling over time.  REITs require none of that. You can just put your investment on autopilot if you wanted, setting up automated purchases to grow your investment over time.

3. Increased liquidity

This facet of a REIT investment is probably the most attractive. For most people a home will be the biggest source of their life savings. If you ever need access to those savings then you’ll have to sell your home to get at it. Access to your money is therefore constrained by how quickly you can find a buyer and who knows how long that can take. If the market is depressed then that further complicates matters.

With a REIT you can just move money in and out as you please. Sell shares at your discretion, just like any other stock. Easy game.

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4. Increased flexibility

Are real estate properties severely underpriced in Hong Kong due to a recent recession? That might be a great opportunity to swoop in, invest and garner huge returns over the next decade or longer. REITs allow you to invest in the most lucrative and attractive real estate options across the globe. It’s not like you’re going to fly to Hong Kong and buy a condo there, are you?

REITs

A new airport is being developed in Kazakhstan? Shopping malls in Tibet? A beautiful and upscale apartment complex in Darjeeling? You could potentially invest in all of that.

5. They pay dividends

Because REITs are mandated to pay out so much of their income as dividends, they have the highest dividend yield of any asset class in the last 20 years. In other words, they generate income. Remember what we said earlier about investments? They generate income.

As a pure investment, REITs are by far the superior vehicle. But obviously people buy houses for reasons other than investment…so we probably won’t see that stopping anytime soon. However, if you are seriously considering dropping a ton of money on real estate, take some time to research REITs before taking the plunge. You might save yourself a lot of dough and headaches in the future.

 

 

 

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3 responses to “Are REITs better than buying a home?”

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