For whatever reason, I have always struggled with investing in real estate. Of course, the major factor in this was the large capital requirement to get into real estate in the first place, but even putting that aside it always felt off to me… Possibly because of my stock/quantitative investment background. Buying real estate seemed so bulky and slow and complicated. Also maintaining it… Everything was just too physical and too slow for me. And yet I always felt like I was missing out. So when the time came to diversify and expand my investment portfolio, I stumbled upon the perfect solution for myself – the REIT!
What is a REIT?
REIT or Real Estate Investment Trust, in simple words, is a company that owns, operates, or finances income-producing real estate. REITs provide all investors the chance to own real estate, and access dividend-based income from the income generated by said real estate. Moreso, these companies revitalize dead real estate zones, build and grow communities.
REITs allow us to invest in real estate assets (or for a better word – portfolios of real estate as they usually own large amounts of real estate) by buying their company stock or an ETF. REIT shareholders earn part of the income produced through real estate investment performed by the company – without actually having to buy, manage, or finance property.
Why I prefer buying REITs instead of actual property
This was a holy grail for me! I didn’t have to hassle with finding a property to buy, taking out a mortgage, then hiring someone to manage that property and deal with annoying tenants… Even better, it allows me to own real estate in various sectors. I was particularly keen on dipping my toe in the Data Center real estate. Having and leasing a property to hold server farms seemed like the way to go in the 21st century. However, this niche was definitely not for a guy with my capital… Moreso – just think of diversification! Say you go and buy an apartment to rent. You only have that one apartment. What if you get horrible neighbors next door. What if someone builds a larger building that obstructs the view from your apartment? What if the above apartment floods yours? All of these factors are risks for your investment, and by having a single large egg in the basket, you are screwed… That was always something that bothered me with real estate too. It’s so expensive and so exposed to these risks. You buy a REIT who cares if one apartment the company owns burns down. Thousands of others will recuperate for the losses there. And they will deal with insurance companies – not you.
The investment process
Ok, let’s talk about the nitty-gritty of putting a stake in REITs.
Doing thorough research on REIT companies may seem very tiring and time-consuming. But if you were considering buying actual real estate, imagine all the time you would have to spend in banks discussing and researching mortgages, viewing various apartments, and finalizing paperwork. Just see it as swapping one task for the other. Hopefully, this will help you with your research motivation! 😄
REITs come in all shapes and sizes. In all fairness, you have to decide first what kind of property is your jam. What do you want to invest in? Is it residential real estate, is it commercial real estate? Do you want to own office buildings or maybe lease out shop spaces in shopping malls? Or maybe having and renting farmland is more up your alley? Whatever… you decide, then the research begins.
Usually, different REIT companies focus on different areas of real estate. The most common are Residential, Industrial, Storage, Health-care, Data centers, Agriculture, Leisure, and hotels. There are others as well and even specialty ones that focus on particular niches. However, those are usually open only to private investors. Inside each of these sectors, companies operate differently. Let’s take Residential, for example. Some companies may be most involved in revitalizing dead/cheap real estate zones. Maybe buying and finishing bankrupt projects from 2007-2008 😅. Others may only be focused on building houses in the suburbs or renting luxury apartments. So once you figure out the sector, you want to jump on, you have to do your due diligence about the companies available to you from that sector. Once you find something that aligns with what you were looking for – great. Oh, wait… there’s also location. What country do you want to invest in? REITs are available all over the globe. Maybe you are only interested in a specific country. Think about that too.
One substantial benefit REITs offer is the ease of diversification. I recommend to really take advantage of it and buy real estate through multiple different companies, possibly from numerous different sectors and even countries too. Always a good idea to widen your portfolio to limit your risk if you have the chance.
You can find a lot of information about different REIT companies and funds at REIT.com.
How REITs generate income? The proof of similarity to owning real estate
Of course, as we already know, different sectors and companies will vary, but, in general, REIT’s income is generated by the owned Real Estate. Think of buying an apartment to rent out. This investment will give you cold hard cash for the rent you will receive from your tenants. It will also (hopefully) grow in value – the income that you don’t really see until you sell the apartment. So kind of a floating or paper income if you will. But then don’t forget that as a landlord you will be maintaining the place. So that might add up as expenses. Now the P&L of your property investment will be a function of all three (and in some cases more) factors. As time rolls, your PnL will fluctuate. Maybe some months you will have rent income, others you won’t. Some years real estate value might rise, others might fall. So if you were to plot your monthly investment P&L, you would see a choppy graph that hopefully goes slightly up over time.
What happens with REITs is very similar. Imagine you are almost buying this plotted PnL chart (of hundreds of apartments). If you invest in a REIT that does Residential renting, then you pretty much get all of those factors of owning your own apartment jumbled into the stock price. In some good cases, you may even get dividends for the hard cash received from renting precisely as if you were renting your apartment.
Final thoughts about REITS and the current global economic situation
Before we part and you start researching REITs, a couple of things I want to go over regarding the pandemic and how it impacts the real estate market. With the forced quarantine, a lot of us had the chance to feel out what does it mean to work from home. Not only that, companies had the opportunity to see if their operations could be performed remotely without a physical office space. And apart from bars and restaurants a lot of businesses managed to operate and, in some cases, even thrive under these conditions. Even if a company had never considered the possibility of remote operation, some of them now know that physical office space is no longer necessary for their business. This also is compelling because of savings on not having to rent out and maintain office space.
Another thing that quarantine forced us to do was reevaluate the significance of owning a house with a yard or, at the very least, a more spacious apartment. It doesn’t take a wise man to realize that those with their own garden had better days during the quarantine than those in a 30 square meter apartment in the city center.
And lastly, since physical stores and shops had to close, a lot of shopping was done online. A lot of businesses started doing deliveries and created their e-commerce websites. This caused the online retailers to have an excellent quarter during the quarantine and encouraged new players in the field.
Now, let’s think about what all of this means to real estate. If fewer and fewer businesses will be tempted to have a physical office space – commercial real estate demand will definitely suffer. With uncertainty about the “second wave” and the future in general, lots in shopping malls will become less attractive as well. Macey’s has stated in the first weeks of quarantine that they will not be paying rent for the property their stores occupy while they are not operational. This again points to a shopping mall/commercial real estate ROI suffering. Due to the increased popularity of e-commerce, the demand for storage facilities should increase. And with people’s appreciation for owning a house with a yard increasing due to uncertain times, such property may become more attractive for potential buyers opposed to apartments. This points to people moving away from city centers more to suburban areas.
Keep all of these things in mind when doing your research.
Hope you guys enjoyed reading about this alternative way of investing in real estate. I am currently working on a quantitative trading system that performs mid-term real estate investments and maintains an optimal real estate portfolio that is well diversified. I plan to share the results of this research with you in later blog posts, so if you are interested in that, make sure to join my mailing list below. I promise not to spam! 😁